Unlike a high-yield or slow-growth company, classic-growth firms generally put most of their profits back into growing their businesses. If the company has a strong ROE, this is to investors' advantage since the firm is reinvesting the money at a high rate of return. The flip side is that payout ratios tend to be low and dividend yields skimpy. If the payout ratio of a classic-growth company is consistently high--say, more than 50% or 60%--it could be a sign that the firm is having trouble finding viable opportunities for growth.
McDonald's is typical of the classic-growth model. With a payout ratio of around 15%, it is putting most of its earnings back into its business. That has been a good thing for investors, too. The company's ROE of 20% is comfortably higher than the median of 8% for all companies. McDonald's also performs well in comparison to the more-reliably profitable S&P 500 companies, which average an ROE of 15%.
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