A4 8e
ABC Co. has the following dividend payment history for the last five years, with the
most recent
dividend being $1.10: $0.50, $0.60, $0.80, $1.00, $1.10.
Historical growth rate estimation
What is the compound growth rate of dividends based on the last five years of dividends data?
Compounded Growth Rate=(Dividend in Year 5/Dividend in Year 1)(1/N)−
Compounded Growth Rate=(1.1/0.5)(1/5)−1
Compounded Growth Rate=2.2(1/5)−1
Compounded Growth Rate = 1.1708 – 1
Compounded Growth Rate = 17.08%
Year
|
Dividend
|
1
|
$1.10
|
2
|
$0.50
|
3
|
$0.60
|
4
|
$0.80
|
5
|
$1.00
|
6
|
$1.10
|
ABC has a retention ratio of 0.9 and a historical return on equity (ROE) of 0.25. Using these two additional pieces of information, calculate an alternative estimate of dividend growth rate, g.
Growth rate = Retention ratio x ROE
ROE=0.25
Retention ratio =0.9
Growth rate =0.9 × 0.25=0.225
Growth rate =0.225
Alternative Growth rate =0.225
e. Calculate the expected growth rate of dividends by averaging the growth rates?