Why will a decrease in the earnings retention rate cause a price-to-sales (P/S) multiple to: increase. A decrease in the earnings retention rate will increase the following expression for P/S due to the implied increase in the payout ratio, which is (1 – b), If we increase the payout then should the stock price P be less
retention rate = b In (1-b), if b decreases, (1-B) grows. Higher dividend = higher price of stock in basically all cases. The DDM puts it very clearly. P/S = (E/S)x [(1-b)(1+g)/(r-g)] If b gets smaller, the numerator grows. I believe the effect on g (through b x ROE = g) is less than the effect on the numerator, but I could be wrong.
if you look at the formula P/S = E/S * (1-b) * (1+g) / (r-g), if you decrease b, the top increases therefore the P/S increases.