Supernormal Dividend Growth

What is Supernormal Dividend Growth?

A supernormal dividend growth rate is a period of time in which the dividends issued on shares of stock are increasing at a higher than normal rate. The high growth rate of payouts are seen as above normal, thus "supernormal." Because this rate is also expected to be unsustainable, the dividend growth rate is expected to return to normal levels again.

Supernormal dividend growth is a projected rate based on an analysis of a company and/or industry, which determines a period of increased earnings and thus potential payouts.

Understanding Supernormal Dividend Growth

Stocks of these dividend paying companies can be valued using a discounted cash flow model. Investors who purchase stocks based on dividends may use three general models:

1. Dividend discount model with no growth in dividends.
2. Dividend discount model with constant dividend growth.
3. Dividend discount model with supernormal dividend growth.

Periods of different rates of growth are discounted separately, then combined to get a theoretical value for the stock or future dividends. In these calculations, investors have to determine the required rate of return, the time periods, and rate of dividend growth, all of which are difficult to predict and can drastically change the valuation of the stock. For common stocks, the stock will eventually be sold, so the projected selling price can also be discounted back and factored into the calculation.

Dividend growth rates change over time. Dividends can be reduced or increased. Certain companies have a long history of increasing their dividend each year or couple years. Other companies try to maintain their current dividend, while other companies are more erratic in their dividends payments, dropping the rate in some years/quarters but increasing it in others. While some companies have dividend growth rates that are trickier to measure, taking a long-term average of the rate of change will provide on estimate of what dividend growth may look like in the future.

When using supernormal growth rates in dividend discount models, the model becomes rather sensitive to the growth rates used, as such, they can have an outsized influence on the ending values. Thus, users of these projections are cautioned to pay attention to the embedded assumptions.

While these calculations may provide some insight into the value of the stock, a investor may also just simply be interested in the increasing dividends. Investors seeking cash flow may look to buy companies that are increasing their dividend, since purchasing that stock now may provide increased cash flow in the future as the dividend rate increases.

Example of SuperNormal Dividend Growth

AbbVie (ABBV) is an an example of a company with strong dividend growth from 2013 to 2019. Certain years could be considered supernormal. In 2013 the company paid $1.60 in dividends. In 2015, dividend payments jumped to $2.02, for a 21.7% increase. This would be supernormal.

In 2016, dividend payments were increased to $2.28, then $2.56 in 2017—jumps of 12.9% and 12.3% respectively. In 2018, dividends increased to $3.59, a supernormal dividend growth of 40%. In 2019, dividends increased but at a decreasing rate: $4.28 for the year was a 19.2% increase over the prior year.

Projecting futures rates requires a lot of assumptions. The dividends increased in each of these years, but at different rates. The average dividend growth over the time period is 18.3%, but this may not be useful going forward as dividends may drop or accelerate, and even over this period, yearly dividend growth varied significantly from the average.