PEG ratio to Dividend Discount Model

CFA General
#1

Hello All

Is there are a way of relating the PEG ratio to the Dividend Discount Model. I am trying to understand the logic behind the PEG ratio and if it can be derived from a standard valuation model such as the DDM.

Thanks is advance for your response.

Matt

#2

P/E = (D(1+g))/(E(r-g))

Dividing that by g on both sides gives you PEG on the left, and its equivalent on the right for the DDM model. It’s not meaningful though. PEG is just an intuitive ratio.

#3

1. P/E (trailing) = D*(1+g)/E0 *(r-g) = (1-r)*(1+g)/(r-g)

Note: D/E0 = dividend payout = (1 - retention rate) = (1- r)

2. P/E (leading) = D*(1+g)/E1 *(r-g) = D1/E1*(r-g) = (1- r)/(r-g)