been very strong, especially in the 1990s. By early 2000,
more cash was being returned to stockholders in stock
buybacks than in conventional dividends.
FIGURE5.4StockBuybacksandDividends:Aggregatefor
U.S. Firms, 1988–2002
Whataretheimplicationsforthedividenddiscountmodel?
Focusingstrictlyondividendspaidastheonlycashreturned
to stockholders exposes us to the risk that we might be
missingsignificantcashreturnedtostockholdersintheform
of stock buybacks. Thesimplest way to incorporatestock
buybacksintoadividenddiscountmodelistoaddthemtothe
dividends and compute a modified payout ratio:
While thisadjustmentisstraightforward,theresulting ratio
foranyyearcanbeskewedbythefactthatstockbuybacks,