If we eliminate g in the P/E = (D/E)*(1/k-g) equation, we got (D%=D/E, ROE=R) P/E=D% * [1/(k-R(1-D%))]–> 1/{[k-R+R*D%]/D%}–> 1/{R+[(k-R)/D%]} therefore, D% is positively related to P/E.
i’m late to the party on this one, but this is how i’d do it. look at it theoretically 1st. #1 - increase div payout increases future cash flows. Price = PV of future cash flows. so if divs increase, cash flows increase, price should increase. #2 also, take opposite side. if you decreased div payout, that means you are paying out less to investors in divs. how would the market react to that? not well. then look at it mathmatically… Price = DE / k-g if div payout was 45%, growth rate = 12% * 55% = 6.6%. P = .45 / .12 - .066 = 6.08 if div payout increased to 55%, growth rate = 12% * .45% = 5.4% P = .55 / .12 - .054 = 6.39