Persistence of abnormal earnings

Identify which characteristic indicates a higher persistence of abnormal earnings:

A. Low dividend payout.
B. Low price-to-earnings ratio.
C. High dividend yield.


Answer: A

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• It is difficult for a company to maintain a high ROE because of competition. The persistence factor will be lower for those companies.
• A company that has a low dividend payout has greater growth opportunities than a company with a higher dividend payout. The greater growth opportunities should support a higher persistence factor. (i.e. higher persistence of abnormal earnings)