Here’s a secret that academics don’t talk about


A company’s future ROE / ROA / ROIC is unlikely to be the same as history,
especially if management allocates capital badly

Meaning I’m no fan of all that Sustainable Growth Rate (SGR) stuff

But before we tackle an example, a quick recap

The SGR = how much the company retains (1- dividend payout ratio) x ROE

Makes sense in theory – if a company has an ROE of 10% and they keep 100% of earnings, they can only grow their equity by 10% unless they increase debt, right?

Great, but note this is about growth in shareholders equity not growth in EPS…

Now let’s put some real-life flesh on those academic bones

Dollar General (DG) has been in the news this week, falling 15% so we’ll start in 2020 when the ROE was 26% (Bloomberg)

“Great business!” many first-level thinkers may shout

They paid out 19% of earnings as dividends so SGR says we should expect a 21% growth in equity (1-19%) x 26% in 2021

And at what rate did they grow their equity?

They didn’t, it fell from $6.70bn to $6.66bn


Did they lose money and suffer a negative ROE?

No, ROE actually increased to 40% in 2021..

But then why did book value fall?

Because they spent $2.5bn repurchasing shares – all their net income

Remember when you issue shares, you increase equity, so when you repurchase shares, you reduce equity

Now throw in the dividend & and you “returned” more than net income = lower equity

So you’re saying the retention formula should include buybacks?

That’s a start

And did EPS fall?

No, they grew 58% in 2021


See why I’m no fan of SGR – tells me very little of any use

What happened in 2022?

Well the lower equity base meant a higher ROE of 40% and a theoretical SGR of 34%

“Even better business”, shout those ROE Junkies

But another $2.5bn of buybacks and Equity is down to $6.2bn

And 2023?

ROE of 37%, SGR of 31%

$2.7bn of buybacks

And would you believe it, equity down to $5.5bn?

So where are we now?

The ROE was 41% last year but now buybacks have stopped..

In March they said, “we remain committed…”

In June, “As planned, we did not repurchase any shares this quarter.”


Well now watch that SGR formula kick in

Who cares, EPS fell 29% in the latest quarter and the stock has halved since 2022

I suspect the buybacks have stopped because they need the cash – they only generated $94m in the last 4 quarters – hardly worth $28bn

But I thought it was a great business and people traded down to these dollar stores when times were tough..

Nope, not when groceries cost more – ask Walmart

And now they need to fund an interest bill that’s doubled over the past year

AND repay $18bn of debt

Spending all their money repurchasing shares on over 20x earnings wasn’t the smartest allocation of capital…

It’s like investing at a 5% rate

So what’s my conclusion?

Nothing is Sustainable, especially Growth Rates