Persistence Factor

[MissCleo]

So a persistence factor of 1 means that the ROE wlil continue in perpetuity above r, and persistence of 0 means that it immediately declines? Is that right? I’m getting conflicting reports.

 

[Straightjacket]

0 means it immediately declines to 0 at T + 1. You still have a value at time T so that you can find T-1 for your terminal residual value

 

[jpsi1]

You are absolutely correct. The residual part of equity value is like value of preferred shares, RI_t/r, in case if w=1. In case if persistence factor drops to zero, the residual part is like terminal dividend discounted one time period, RI_t/(1+r).

 

[CFABeastMode]

And is high ROE or high div payout indicative of high persistence? I forget

 

[jpsi1]

Low div payout - higher persistence
High ROE - lower persistence

 

[DeadCatBounce]

low non recurring items - higher persistence

 

[revenant]

Don’t quite understand these, can someone elaborate further? Thanks.
Low div payout - higher persistence
High ROE - lower persistence
low non recurring items - higher persistence

 

[growinginside]

Low dividend payout indicates that management is spending money on capital projects which will increase returns in the future. eg Apple, their paying a dividend was seen as a signal there are no new revolutionary products upcoming.
High ROE without any other explanation could suggest that high ROE this period was an anamoly and company profits will soon revert to average - this is a bit of a gray area for me.
Low non-recurring items would indicate that high profits this quarter were not due to some unusual factor eg jump in income for a Japanese construction company after tsunami would be a non-recurring item, we would not expect this income to persist into the future.

 

[revenant]

Thanks for the clear explanation.

 

[sgupta0827]

Extending further what growinginside has already said.

growinginside wrote:
Low dividend payout indicates that management is spending money on capital projects which will increase returns in the future. eg Apple, their paying a dividend was seen as a signal there are no new revolutionary products upcoming.
[saurabh] This also means that if I am not distributing dividends that means I think that I can can earn better return in my comnpany itself rather than venturing out for external investments. You can’t be so sure about your own earnings unless you have some money making machine like patent. If it is for the simple business like wheat farming, your neibhor uncle Joe is going to be jealous of your growth and he will set up the farm right next to you, and this competition will take away all your profits. Remember Porter Five!
High ROE without any other explanation could suggest that high ROE this period was an anamoly and company profits will soon revert to average - this is a bit of a gray area for me.
[Saurabh] This is the best example of wheat farming as explained in the last point.
Low non-recurring items would indicate that high profits this quarter were not due to some unusual factor eg jump in income for a Japanese construction company after tsunami would be a non-recurring item, we would not expect this income to persist into the future.
[Saurabh] Of course, people only trust only on the operational earnings. For example, if you own a burger shop, people are going to look for how many burgers did you sell and what was the cost of making them. If you couldn’t sell the burgers in one period and instead you plan to sell the oven of your restaurant to make up for the loss of not able to sell the burgers. First thing I would doubt that you couldn’t sell the burger in the current period, that’s fine, but you sold the oven as well that you used to produce the burger, meaning you are not confident whether you will be able to sell the burgers in the future as well and thus you have planned on liquidating the assets.