Hi there, While reading chapter 42, I realized that the three-stage dividend discount model assumes that the first stage has high dividend growth, the second stage (div slow down) and the third stage is a growth rate for dividends that can be sustained continuously. However, I don’t understand why a company would go through such stages. Generally, a company exhibits high profitability and earnings growth in the beginning but their dividends are generally low and then as the company matures and no longer invests in capital expenditures, then their dividends distribution would grow as they would have more positive free cash flow. Any thoughts?
the rate of div payout is also dependent on “g”. a typical growth company will have supernormal growth for X amount of years. Being that supernormal growth is unsustainable, the next few years the growth decreases until the point it is sustainable…hence the 3 stage model.
I get that but is that referring to earnings growth or dividend growth? I understand they are dependent on one another however if you have low dividends in one yr, despite high earnings, that means reinvestment in cap expenditures which means future high growth of dividends. I thought that the 3 stage model was designed to reflect high earnings growth with low dividend distribution eventually which will lead to higher distribution as the company matures. That’s a more realistic scenario than the reverse which is discussed by the book.
canadiananalyst Wrote: ------------------------------------------------------- > I get that but is that referring to earnings > growth or dividend growth? > > I understand they are dependent on one another > however if you have low dividends in one yr, > despite high earnings, that means reinvestment in > cap expenditures which means future high growth of > dividends. > > I thought that the 3 stage model was designed to > reflect high earnings growth with low dividend > distribution eventually which will lead to higher > distribution as the company matures. > That’s a more realistic scenario than the reverse > which is discussed by the book. Just went over this so I hope I have it right. Re your last paragraph: You could still figure out the PV of the stock using the same framework as discussed in the readings. So maybe it’s just presented that way to make it easier to learn? IDK.