Calculating a Company's Implied Dividend Growth Rate
Recall that a company's ROE is equal to a company's earnings growth rate (g) divided by one minus a company's payout rate (p).
Example:Let's assume Newco's ROE is 10% and the company pays out roughly 20% of its earnings in the form of a dividend. What is Newco's expected growth rate in earnings?
Answer:g = ROE*(1 - p)
g = (10%)*(1 - 20%)
g = (10%)*(0.8)
g = 8%
Given an ROE of 10% and a dividend payout of 20%, Newco's expected growth rate in earnings is 8%.
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