Have I got this right?
D1 = D0 + change in EPS * target ratio / years
That means if EPS doesn’t change, the divident gets no closer to the target…? Doesn’t seem the best way reach the target ratio…
I can memorize this formula but I just don’t get it…
Yeah tell me about it. I don’t get it either. Effectively you’re applying the new ratio to incremental earnings only. This means you’ll never reach the target ratio. Makes no sense to me. I’ve justified it to myself that this method makes sense because you can’t vary your dividends much, else investors freak out. I’d love for someone to provide an actual explanation though.