So a persistence factor of 1 means that the ROE wlil continue in perpetuity above r, and persistence of 0 means that it immediately declines? Is that right? I’m getting conflicting reports.
You are absolutely correct. The residual part of equity value is like value of preferred shares, RI_t/r, in case if w=1. In case if persistence factor drops to zero, the residual part is like terminal dividend discounted one time period, RI_t/(1+r).
Low dividend payout indicates that management is spending money on capital projects which will increase returns in the future. eg Apple, their paying a dividend was seen as a signal there are no new revolutionary products upcoming.
High ROE without any other explanation could suggest that high ROE this period was an anamoly and company profits will soon revert to average - this is a bit of a gray area for me.
Low non-recurring items would indicate that high profits this quarter were not due to some unusual factor eg jump in income for a Japanese construction company after tsunami would be a non-recurring item, we would not expect this income to persist into the future.