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Technology Stocks : LSI Corporation
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To: shane forbes who wrote (18968)6/19/1999 7:29:00 AM
From: shane forbes  Read Replies (1) of 25814
 
corrected para to put in the 'maximum' growth rate:

When companies retain 100% of their earnings their sustainable growth is maximized - it can be as high as their beginning of year ROE. On the other hand, when they pay say 40% of income in dividends they give up 40% of their potential maximum sustainable growth rate. If they want to grow at the same maximum pace as the comparable company that does not pay out dividends they have to take on debt. Not good.

(The key is that for a company with say a proprietary product and a very high ROE, say 25%, it is very possible that the maximum growth rate in the industry is only say 15% or the company may chose to grow at such a manageable rate and no higher. In this particular case the company can happily pay out 40% of their earnings and maintain a 15% sales growth rate. Note also that next year the dividend can be raised without hurting anything.)
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