The first method: estimate according to the growth rate of retained earnings. The company's income can be divided into two parts, one is to pay cash dividends, and the other is retained income. To simplify the calculation, the following assumptions are made: (1) The growth rate of cash dividends (marked G) and the retention rate of corporate income (marked B) remain unchanged.
Retention rate = (earnings per share-dividend per share)/earnings per share, also known as earnings retention rate.
(2) The retained earnings of the company are all regarded as new investments in the current year, and the rate of return on new investments is equal to the rate of return on net assets (recorded as ROE).
(3) The growth of the company's income comes entirely from the income generated by its new investment.
According to the above assumptions, we can get the following relationship: e1= E0+ E0 * B * ROE = E0 (1+b * roe), the growth part of the company's income is equal to the current year's income E0 * retention ratio b * roe of net assets, and the current year's income E0+growth part = the next year's income e 65438+. Divide both sides of the above formula by E0 to get E 1/E0=( 1+b* ROE).
Because the retention rate of the company's profit is B, (1-b) is the cash dividend payment rate, and the cash dividend D=E*( 1-b), it is introduced that:
Therefore, g= b* ROE, growth rate g, is not only the growth rate of dividends, but also the growth rate of corporate income or profits. According to the formula g=b*ROE, the profit growth rate depends on two factors, one is the retention rate B, and the other is the growth rate determined by the formula ROE, also known as the sustainable growth rate. Other things being equal, the higher the company's retention rate, the higher the growth rate; The higher the company's return on net assets, the higher the growth rate. Therefore, there are two fundamental ways to improve the company's profit growth rate. The first is to improve the return on net assets, and the second is to reduce the cash dividend distribution when there are good investment opportunities.
Let's look at the first method to improve the return on equity. Return on net assets (ROE), also known as return on shareholders' equity, return on net assets and return on net assets, is the percentage of net profit and average shareholders' equity, which is the percentage rate obtained by dividing the company's after-tax profit by its net assets. This indicator reflects the income level of shareholders' equity, and is used to measure the efficiency of the company's use of its own capital, which is an important indicator to measure the profitability of enterprises. The higher the index value, the higher the return on investment. Using DuPont analysis, ROE can be decomposed into the product of three financial indicators, namely: ROE = net operating profit rate x total assets turnover rate x equity multiplier. Therefore, we can consider how to improve the return on net assets by analyzing these three main factors.
Let's look at the second way, when there are good investment opportunities, reduce the cash dividend distribution. Cash dividend is the main form of dividend payment, and the index to measure the amount of dividend payment is dividend payment rate, also known as dividend payment rate and dividend payment rate. If the retention rate is recorded as b, (1-b) is the dividend rate. The dividend payout ratio reflects the company's dividend policy. You should often read some articles on the Internet criticizing some listed companies for not paying cash dividends for many years, saying that these companies are stingy and calling them "misers". However, if you look at the formula g=b*ROE we got earlier, it doesn't mean that the higher the dividend rate, the better. It depends on whether the company has good investment opportunities. When there are good investment opportunities, low dividend or even no dividend is a dividend policy to maximize shareholder value.