Supernormal Dividend Growth

What is Supernormal Dividend Growth?

A supernormal dividend growth rate is a period of time wherein the dividends issued on shares of stock are expanding at a higher than normal rate. The high growth rate of payouts are viewed as better than average, subsequently "supernormal." Because this rate is additionally expected to be unsustainable, the dividend growth rate is expected to return to normal levels once more.

Supernormal dividend growth is a projected rate in light of an analysis of a company as well as industry, which determines a period of increased earnings and hence potential payouts.

Figuring out Supernormal Dividend Growth

Stocks of these dividend paying companies can be valued utilizing a discounted cash flow model. Investors who purchase stocks in light of dividends might utilize three general models:

1. Dividend discount model with no growth in dividends.
2. Dividend discount model with consistent dividend growth.
3. Dividend discount model with supernormal dividend growth.

Periods of various rates of growth are discounted separately, then, at that point, combined to get a hypothetical value for the stock or future dividends. In these calculations, investors need to determine the required rate of return, the time spans, and rate of dividend growth, which are all challenging to anticipate and can radically change the valuation of the stock. For common stocks, the stock will eventually be sold, so the projected selling price can likewise be discounted back and considered into the calculation.

Dividend growth rates change over the long haul. Dividends can be diminished or increased. Certain companies have a long history of expanding their dividend every year two or three years. Different companies try to keep up with their current dividend, while different companies are more flighty in their dividends payments, dropping the rate in certain years/quarters however expanding it in others. While certain companies have dividend growth rates that are trickier to measure, taking a long-term average of the rate of change will give on estimate of what dividend growth may resemble from here on out.

While utilizing supernormal growth rates in dividend discount models, the model turns out to be somewhat sensitive to the growth rates utilized, in that capacity, they can impact the ending values. Consequently, users of these projections are advised to pay consideration regarding the embedded suppositions.

While these calculations might give some understanding into the value of the stock, an investor may likewise just essentially be keen on the rising dividends. Investors seeking cash flow may hope to buy companies that are expanding their dividend, since purchasing that stock currently may give increased cash flow in the future as the dividend rate increases.

Illustration of SuperNormal Dividend Growth

AbbVie (ABBV) is an illustration of a company with strong dividend growth from 2013 to 2019. Certain years could be thought of as supernormal. In 2013 the company paid $1.60 in dividends. In 2015, dividend payments leaped to $2.02, for a 21.7% increase. This sounds supernormal.

In 2016, dividend payments were increased to $2.28, then $2.56 in 2017 — bounces of 12.9% and 12.3% separately. In 2018, dividends increased to $3.59, a supernormal dividend growth of 40%. In 2019, dividends increased yet at a decreasing rate: $4.28 for it was a 19.2% increase over the prior year.

Projecting futures rates requires a ton of suspicions. The dividends increased in every one of these years, however at various rates. The average dividend growth throughout the time span is 18.3%, yet this may not be helpful proceeding as dividends might drop or accelerate, and, surprisingly, over this period, yearly dividend growth shifted fundamentally from the average.

Highlights

• Supernormal dividend growth, or any growth rate chosen, will essentially affect the hypothetical value of a stock in view of dividend discount models.
• Supernormal dividend growth is when dividends develop at a lot higher rate than normal.
• Supernormal dividend growth isn't generally sustainable for extended periods of time.