06-24-2015, 11:42 AM
I like how the DuPont method breaks apart Return on Equity to see what is driving the growth in ROE: ROE = Net profit margin * asset turnover * equity muliplier
This lets you see if the changes in ROE are from growth (net profit margin), increased efficiency (asset turnover), or management tinkering with leverage (equity muliplier).
http://www.investopedia.com/articles/fun...alysis.asp
Similarly, I have issues with historical average dividend growth rates and future projected dividend growth rates. There are too many levers a company can pull to make themselves look better than they are in reality. What caused past DGR? What will cause future DGR? It seems that dividend growth rates can be traced to changes in the payout ratio, changes in the number of outstanding shares, and changes in profitability.
Is the DGR from increasing the payout ratio? How long until the company runs out of payout ratio to use up?
Is the DGR from decreasing numbers of outstanding shares. Would you rather have more profits paid to stock buybacks or more dividends? Are the buybacks fueled by increasing debt?
Is the DGR from increasing profitability? Are profits going up because of less taxes? More revenue? Less expenses?
Where are future profit increases going to come from? There is only so much you can do to reduce taxes and expenses.
In the end, how is the company going increase revenue? More products, price increases, more volume, expanding to new countries?
Sorry for the long thought exercise, but sometimes it helps to write out ideas. The more I think about this subject, the more I come to the conclusion that eventually a company has to consistently grow revenue if it wants to consistently grow dividends. Tinkering with payout ratios, stock buybacks, leverage, expense and tax reductions only take you so far.
Tinkering with the math:
Dividends Per Share = Earnings Per Share * Payout Ratio
Dividends / Shares Outstanding = (Earnings / Shares Outstanding) * Payout Ratio
Dividends = Earnings * Payout Ratio
Dividends = [(Revenue - Expenses) * (1 - Tax Rate)] * Payout Ratio
This lets you see if the changes in ROE are from growth (net profit margin), increased efficiency (asset turnover), or management tinkering with leverage (equity muliplier).
http://www.investopedia.com/articles/fun...alysis.asp
Similarly, I have issues with historical average dividend growth rates and future projected dividend growth rates. There are too many levers a company can pull to make themselves look better than they are in reality. What caused past DGR? What will cause future DGR? It seems that dividend growth rates can be traced to changes in the payout ratio, changes in the number of outstanding shares, and changes in profitability.
Is the DGR from increasing the payout ratio? How long until the company runs out of payout ratio to use up?
Is the DGR from decreasing numbers of outstanding shares. Would you rather have more profits paid to stock buybacks or more dividends? Are the buybacks fueled by increasing debt?
Is the DGR from increasing profitability? Are profits going up because of less taxes? More revenue? Less expenses?
Where are future profit increases going to come from? There is only so much you can do to reduce taxes and expenses.
In the end, how is the company going increase revenue? More products, price increases, more volume, expanding to new countries?
Sorry for the long thought exercise, but sometimes it helps to write out ideas. The more I think about this subject, the more I come to the conclusion that eventually a company has to consistently grow revenue if it wants to consistently grow dividends. Tinkering with payout ratios, stock buybacks, leverage, expense and tax reductions only take you so far.
Tinkering with the math:
Dividends Per Share = Earnings Per Share * Payout Ratio
Dividends / Shares Outstanding = (Earnings / Shares Outstanding) * Payout Ratio
Dividends = Earnings * Payout Ratio
Dividends = [(Revenue - Expenses) * (1 - Tax Rate)] * Payout Ratio
