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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (1137)	1/24/1999 1:13:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Dividend Yield Models etc... >>>>"... Price can be estimated as the present value of future dividends, discounted at the required rate of return .... A bit of mathematics shows that this measure is roughly equal to one divided by the difference between the required rate of return and the anticipated dividend growth rate. "The long-term historical growth rate of corporate dividends is is about 8%, but over the past 20 years the rate has been about 10%. Assuming future growth of 9% and a required return of 11%, the two-percentage-point difference between 9% and 11% is 1/50. Thus, the appropriate ratio of price to dividends is 50, just about what it is now"<< I don't where this guy gets his information from but it's total nonsense. Fist of all, dividends cannot grow faster than earnings over the long haul or dividends would eventually be greater than earnings. When we are talking about dividend discount models that's what we are talking about, the long term. The long term growth rate of corporate profits is around 5.4% +/-. In recent decades or so it has been slightly faster than that due to declining interest rate costs and other temporary tail winds that were catchups from the inflationary periods. These tailwinds cannot continue indefinitely. Second, profit growth cannot outstrip the gains in nominal GDP either, or profits would eventually be greater than GDP. Third, dividends are not what is important. Free cash flow or the amount that "could" be paid out in dividends is the value related number. That is the amount of money left over after capital expenditures, working capital additions, acquisitions and other required spending that produces the growth to begin with. These numbers should be measured not on a short term basis. Expenses like these vary from period to period. So what we are left with is that given a steady payout ratio, dividend/free cash growth will track profit and nominal GDP growth over the long haul give or take a very minor amount. The present assumptions for the sustainable growth in real GDP in the U.S. are between the 2.5% and 3.5%. I have seen no higher estimates. The Fed believes it is lower than that upper range presented. Present assumptions are that inflation will average 1%-1.5% over the next 30 years. That would give us between 3.5%-5% free cash flow growth. If inflation assumptions turn out to be too low over the long or medium haul, the growth numbers will move up but so will the required return. Crunching the numbers of many companies indicates that some "with extra free cash flow" are repurchasing shares instead of paying dividends. This is tax efficient and wise. So the actual dividend/free cash flow yield is about .5% higher (give or take) than the 1.3%-1.5% that is presented for the DOW and S&P500. I have not seen the aggregate payout or dividend yield for the country but I suspect that the overall dividend yield is higher and the buybacks are much lower. You can do some estimates from this information about what range of rates of return are possible from here. Wayne Crimi Value Investor Workshop members.aol.com

To: porcupine --''''> who wrote (1137)	1/24/1999 1:39:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

More on Dividend Yields: From me: >>The present assumptions for the sustainable growth in real GDP in the U.S. are between the 2.5% and 3.5%. I have seen no higher estimates. The Fed believes it is lower than that upper range presented. Present assumptions are that inflation will average 1%-1.5% over the next 30 years. That would give us between 3.5%-5% free cash flow growth.<< Here's a quick calculation on this. The dividend yield on the DOW is 1.67% The dividend Yield on the S&P500 is 1.32% If we add the .5% to the yield we get 2.17% for the DOW and 1.82% for the S&P500. The dividend discount return calculation is the sum of the yield and the growth rate. The DOW return is 5.67% - 7.17% The S&P500 return is 5.32% - 6.82%. These are reasonable estimates assuming all present assumptions about everything remain the same. However, it does leave out some very important considerations about whether the present very high spread between the cost of capital and its return are sustainable. 125 years of history and standard economic theory suggests it is not. Without going into the details of that discussion, it is a serious risk to those returns. Another risk is short term in nature. Dividend discount models assume a holding period of many many decades. (like 75 years) Any decline in stock prices to more average levels over the next 10-20 years, will wipe away almost all gains over that period and will produce significant losses if they should occur within the next 5 years. So most purchases made at these levels are highly speculative in nature unless you won't be touching the money until you are dead. Wayne Crimi Value Investor Workshop members.aol.com