Sustainable growth and distributable earnings under inflation

Abstract

This paper examines the effect of inflation on the relationship between a firm’s sustainable real growth rate and its dividend payout ratio. Ceteribus paribus, dividend payout ratios are found to decrease monotonically with increasing inflation. The extent of the decline depends on the life of assets employed, being larger for firms employing short-lived assets. Analysts using constant growth models should expect either lower dividend payout ratios or lower dividend growth rates with increasing inflation.