Hi Guys
Just a bit confused regarding dividend growth and company valuation. The leading justified P/E ratio indicates that a higher dividend payout ratio increases the company valuation (if the growth rate is growing aswell rather than staying constant). However in real life scenarios it is often that a company with a lower dividend payout usually has a higher valuation. Why is there a conflict between theory and real life?
Thanks in advance
My guess is that companies with low to no dividend payouts have internal investment opportunities that are well above the market rate of return. Investors will pay up in the form of a higher P/E to own companies like that.
Thats because you normally can’t have both - high payout and high growth. High payout is not to be confused with high absolute dividends. g = RR x ROE and RR = 1-div payout ratio.
If you do the math, high RR (i.e. low payout), means high g and vice versa.