Obviously it would lend to above average SP growth. This isn't necessarily a good thing. You will always end up with more money if you slowly compound a large amount of money than if you distribute the money.Think about the numbers of my example below, you have a higher share price by retaining earnings but it comes at the cost of a lower overall return if the return is too low. Growth is only good if the return is good. BYL isn't too bad because it is achieving 15% RoC so it is making more than I could make by reinvesting the return (based on market averages).
Company 1
assume fixed at RoC 20%
assume fixed Yield 10% (hence fixed PE too)
Payout ratio 100%
Starting SP $10
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 0 Year 1 2 3 4 5 1 Earnings $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 2 DPS $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 3 4 5 Dividends received $ 5.00 6 SP after 5 years $ 10.00 7 Total return $ 15.00 (After 5 yrs)
Company 2
assume fixed at RoC 20%
assume fixed Yield 10% (hence fixed PE too)
Payout ratio 30%
Starting SP $10
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 0 Year 1 2 3 4 5 1 Earnings $ 1.00 $ 1.07 $ 1.14 $ 1.23 $ 1.31 2 DPS $ 0.30 $ 0.32 $ 0.34 $ 0.37 $ 0.39 3 4 5 Dividends received $ 1.73 6 SP after 5 years $ 13.11 7 Total return $ 14.83 (After 5 yrs) 8
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