Dividend Policy, Growth, and the Valuation of Shares-Revisted (With Addendum)

Abstract

John D. Van Sant

In the first draft of this paper published by SSRN in September, 2025, I argued that the market would place a higher value on the shares of a corporation that retained all its earnings if that corporation began paying dividends. I offered circumstantial evidence for this proposition but no actual examples. In this paper I present in an addendum empirical evidence that the market places a higher value on the shares of corporations with equal earning power but which pay dividends, with the valuation rising with an increase in the payout ratio. Other than this paragraph in the abstract and the Addendum, this paper is unchanged from the original.

Two studies demonstrate that corporate earnings grow directly and positively with the rate at which corporations retain their earnings. One study analyses the relation between historical retention and growth rates of the S&P 500 index, the other is a longitudinal study which examines the retention and growth rates of individual corporations during the period from 2004 through 2024. This second study also shows the deciles of corporate stocks sorted by retention rates will have approximately the same mean price-to-earnings levels. The market values the high volatility stocks of companies with high retention levels and high growth rates equally with the low volatility stocks of companies with low retention and low growth rates. The data imply that during the 2004-2024 period the market valued a dollar of dividends more than a dollar of earnings, contrary to the "dividend irrelevancy" conjecture of Miller and Modigliani. This paper also demonstrates how studies which find earnings growing slower after high retention levels and faster after low retention levels are the result of earnings falling in recessions and growing rapidly thereafter. G11, G12, G14, G17, and G23.

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