A company grows based on how much it reinvests and the quality of its investments. Companies that pay out dividends have less capital left over to reinvest; therefore, their long-term sustainable growth rate is expected to be less than the return on equity. As the payout ratio increases, the chance for price appreciation decreases, along with the diminishing expected growth rate:
Expected Long-Term Sustainable Growth Rate = (1 - Payout Ratio) * (Return on Equity)
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