In my notes I have Persistence Factor is HIGH when: 1. Low dividend payouts 2. High Residual income persistence factor in the industry Persistence factor is LOW when: 1. High ROE’s 2. Significant level of non recurring items 3. High Accounting Accruals More sustainable the competitive advantage and better the industry prospects, the higher the persistence factor. Can someone please explain this to me. Why is a HIGHER persistence factor better?
It means that economic profits are going to continue for a long time. That is difficult to do and it is VERY desirable.
High Persistence Factor will help you keep those bigger margins with you for long, per year every year (till you have that competitive advantage with you). So higher the better.
So then whyis the Persistence factor LOW when there are HIGH ROE’s?
If I remember correctly, the best way to illustrate this is with a formula: Div = 1 r = 10% 1/1.1 = .91 (no persistence factor) 1/(1.1 - .5) = 1.67 (.5 persistence factor) 1/(1.1 - 1) = 10 (1 persistence factor) Please disregard if I am dead wrong.
High ROE’s will probably attract new entrants. Increased competition will reduce the ROE and lower future residual income (lower persistence).
I think this ties in with Porters stuff (which I suck at). I agree with Mcleoad that high ROE will attract others (think growth phase of an industry). So the product has been accepted and now everybodies sales are booming, competitive forces are going to step up as new firms enter the game. But if you can hold a competitive advantage in a mature industry then you are doing something special and will have a high persistence factor.