where dis next period’s dividend per share, gis the constant rate of fu-
ture growth of dividends per share, and ris the discount rate that in-
vestors apply to stock.
From this model, it appears as if an increase in growth gunam-
biguously raises the price of shares. But the gin the Gordon equation
refers to the growth in per sharedividends, not the growth in aggregate
dividends, and the two concepts can deviate substantially, as the histor-
ical data confirm.ECONOMIC GROWTH AND STOCK RETURNS
The summary statistics for dividends per share, earnings per share, and
stock returns for the U.S. economy from 1871 through December 2006
are shown in Table 8-1. The data show that real per share earnings
growth over the entire 135 years has averaged a paltry 1.88 percent,
considerably below the growth rate of real GDP, which is about twice
that number. As noted above, because shares and/or debt must be used
to finance capital expenditures, earnings per share growth do not match
aggregate economic growth over the long run.
It is also of interest that the growth of earnings and dividends per
share is higher since World War II than before even though the GDP
growth is lower. The cause of the higher earnings growth in the last 60
years is the decline in the dividend-payout ratio and subsequent in-
crease in the use of retained earnings to finance growth.
As explained in Chapter 7, the valuation of a firm is independent of
the dividend policy chosen as long as the rate of return on retained earn-
ings is identical to that demanded by shareholders. This can be shownCHAPTER 8 The Impact of Economic Growth on Market Valuation and the Coming Age Wave 127
TABLE 8–1
Summary Statistics for Dividends per Share, Earnings per Share, and Stock Returns for the U.S.
Economy, 1871 through December 2006Real GDP
GrowthReal per Share
Earnings GrowthReal per Share
Dividend Growth Dividend Yield* Payout Ratio*1871-2006 3.57% 1.88% 1.32% 4.58% 58.17%1871-1945 3.97% 0.66% 0.74% 5.29% 66.78%1946-2006 3.09% 3.40% 2.03% 3.53% 51.38%*Denotes median.