Herd Mentality

Paying Up For Growth: You’d Better Know What you Are Doing

Let us do a mathematical experiment here. A company earns $10 per share and out of that, pays a dividend of $8 per share.  If one were to apply a 20 times multiple in the dividend stream going forward , the value of the dividends in perpetuity is $160.  So we could make the argument here that the company is worth at least $160 if the dividend stream is fairly consistent. The $2 per share in retained earnings could lead to some real growth in the future. So if an investor decides to pay $100 per share for that company, that would be considered a good buy from an investor's stand point. (more…)