Explain the growth, transition and maturity phases a business passes through
The idea
Companies are often modelled as passing through three phases. In the growth phase, earnings grow quickly, margins are high and reinvestment needs are heavy, so dividends are small or nil and free cash flow may be negative. In the transition phase, competition arrives, growth slows towards the economy's rate, margins narrow, investment needs ease and the payout ratio rises. In the mature phase, return on equity settles near the required return, growth is stable and payout is high. Multistage dividend models mirror these phases, with a separate growth assumption for each. The trap is assuming a company in its growth phase will keep its current return on equity and growth indefinitely, or valuing it with a single-stage model.
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