Sustainable EPS growth rate for S&P500

This is what’s been bugging me for a while now… The sustainable growth rate for mature companies/industries like SP500 should be (1-payout ratio)*ROE or (1- payout ratio)*NPM*asset turnover ratio *leverage.

Payout ratio of SP500 has been pretty steady around 30% I believe and ROE around 12-13% according to most websites. This would leave us with EPS growth of somewhere around 8-9%. This used to be long term expected return for broad market investment.

JPM “guide to the markets” is now saying that Dividend Growth and EPS Growth SP500 for next 10 years is around 4.5-5%…this number is only about 50% of above calculation so where’s the difference coming from? I can see that leverage has been in down trend in last 10 years but unless companies repay all debt with the 70% of NI that they’re not paying out as dividends NPM and/or asset turnover ratios would have to come down as well?

Shouldn’t your POR include buybacks?

So I’m not really an academic sort of guy and don’t care about that formula, but I think this 4% growth seems realistic. The USA has peaked, that game is over, if you want 10% going forward I think you gotta go to China.

Hmmm thought about that argument as well but if companies buy back their own shares then this investment into itself should yield same ROE-therefore I can’t see much difference between investing company profits into NEW projects with similar ROE or into same projects (company) apart from possible diversification benefits from investment in something else. Therefore EPS should be up (eg growth) by similar amount ?


I believe that dspapo is correct, share buybacks needed to be treated the same as dividends and incorporated into your calculation of payout ratio