Sunday, April 08, 2012

Historical Real Return on Retained Earnings for the S&P500

Here's a chart using the S&P500, showing the return on retained earnings for the past 5 years at each point (the data goes back about 75 years).  I use the real earnings increase from 5 years ago to now, and divide it by the sum of retained real earnings over that time.

This seems to indicate that there is usually a sustained period of positive real returns on retained earnings for a few years before it turns back.  I was a bit surprised to see 35-40% as the peak, meaning that for every dollar retained over 5 years, the earnings grow by $0.35 to $0.40 on the dollar.  I guess that is offset by the poor years in between where all those retained earnings are lost (and then some).

When you factor in that the payout ratio of the S&P500 has gone from ~60% at the beginning of this period to ~30% right now, this effect is likely to be a much larger part of stock price variation going forward.

Over the next 5 years, if the payout ratio stays at 30%, and the retained earnings return is 30%, you'd expect the S&P500's real earnings to be at about double what they are today... even if the PE multiple doesn't change, that chalks up to 15% return per year!

1 comment:

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