8 Dividend Analysis and Preliminary Valuation Marlinese Barron The University of Arizona

8
Dividend Analysis and Preliminary Valuation
Marlinese Barron
The University of Arizona Global Campus
BUS 401: Principles of Finance
Margaret January
07/19/2021
Dividend Analysis and Preliminary Valuation
One will need to create a table that shows the yearly dividends per share paid by a chosen business over the last ten years.
52-Week Higher
52-Week Lower
Dividend paid
Vol
Yield
P/E
Day Previous
Net Income
7.55
10,000,000
3,200
75
22.30
10,000,000
48.10
33.76
10,000,000
2,800
6.0
20
42.10
10,000,000
26.50
22.50
10,000,00
1,910
4.6
13
23.10
10,000,000
82.50
32.50
10,000,000
7,549
32.60
10,000,000
There are some parallels between earnings per share (EPS) and dividend per share (DPS), but there are also some differences. EPS is a statistic that measures how profitable a business is per share of its common stock (Singh, & Tandon, 2019). How much a company pays out in dividends provides investors an indication of how much it has on hand for reinvesting in growth, paying down debt, or building up cash reserves. A company’s income statement may be used to determine this ratio. On the other hand, dividend yield relates the dividend payout to the current stock price of the business. You own 10 million shares of a Home Depot & Lowes company that paid a total of $10 million last year. Enter “Dividends per Share” in cell A1 of Microsoft Excel (Dalton, & Pointon, 2019).
Then, put =10,000,000/10,000,000
=$1
Each year, calculate the increase in dividends per share and add this growth rate within the chart
An increase in dividends is measured as an increase in the dividend percentage growth rate over some time. Often, dividends are computed every year, although this is not always true. But it may also be done quarterly or monthly. It is calculated by dividing the current period’s Di by the previous period’s DI-1, deducting one from the result, and expressing it in percentages. In evaluating a company’s long-term profitability, the dividend growth rate is an essential statistic.
Year
Dividend
Dividend Growth Rate
1
$1.00

2
$1.06
5.5%
3
$1.16
8.80%
4
$1.18
9.95%
5
$1.25
1.75%
6
$1.28
6.85%
7
$1.30
7.00%
8
$1.32
7.20%
9
$1.34
7.35%
19
$1.35
8.00%
Growth rate averaged over 10 years;
{($1.35/1.00) ^1/10}-1
=0.03046 or 3.046%
Averaging Development level for 5 years;
[($1.25/1.00) ^1/5]-1=0.1180
0.1180*100=11.80%
Average Development level of 3 years;
[($1.16/1.00) ^1/3]-1=0.5019
0.05019*100=5.019%
An ever-changing market and an ever-evolving company make many investment formulae a bit too simple. A steady growth rate isn’t always appropriate when dealing with a growing business. 11.80 percent and 3.046 percent, respectively.
Calculating the reasonable growth rate
.
The formula for calculating the sustainable growth rate. This is the most incredible rate of growth that a business can maintain without external funding, and it is measured in percentage points each year. The company’s sustainable growth rate will be: if Home Depot & Lowes Corp.’s ROE is 16 percent and its dividend payout ratio is 70 percent (Fischhendler, & Tenenboim-Weinblatt, 2019).
Ratio of sustainable growth=16*(1-70%) =4.8 percent
Dividends per share calculation
Companies may raise or decrease dividends (they’re typically paid quarterly) throughout the year and issue or repurchase shares, which might alter the share count. This information may be found in a company’s most recent press release or SEC filing when it declares its next dividend or through a reputable online broker (Dhandra, 2019).
Dividend Growth at the Low End of the Market
Calculate stock price using the following formula
Dividend per share = Required Rate of Return / Dividend Growth Rate
As a result, the formula was still being studied.
$1.55 / (0.0850 – 0.05) = $46
Generally, if, as an investor, you want to see a greater return on your investment, you may tweak the formulae. Assume you want to see a 10 percent return on your investment. Based on the present dividend rate and growth rate, what would be the correct price?
The formula is as follows:
The formula:
$1.55 / (0.10 – 0.06) = $32.19
Dividend growth at the high end
A dividend growth rate (g) of 4.0 percent (g) is used as a starting point for calculating the dividend growth rate. A recent dividend of $3.12 per share has been paid out to shareholders (D). The discount rate will be 10.0 percent since the business has a high market capitalization (r). This results in an estimated stock price of $54.08 per share for PG. This is the result of my calculations: The price is $3.09 (1 + 0.05) divided by (0.10 divided by 0.03)
$3.12 (1.05)/ (0.05)
Price = $3.2550/ 0.05
Price = $55.10
For certain businesses, the dividend discount concept is not a suitable match. As a result, many growth stocks can’t be assessed in this manner. It may make more sense for investors to wait for Home Depot and Lowes’s stock price to fall before buying the shares. For younger businesses that have recently begun paying dividends or have had irregular dividend payments, the approach may be challenging to apply, too (Dalton, & Pointon, 2019).
Period
Dividend
Control
Quantity
Present Value
One
D 1
$1.50 x 1.16 1
$1.70
$1.69
Two
D 2
$1.50 x 1.16 2
$1.88
$1.49
Three
D 3
$1.50 x 1.16 3
$2.19
$1.59
Four
D 4
$1.50 x 1.16 4
$2.60
$1.70
 
 
 
 
 
Five
D 5 …
$2.600 x 1.05
$2.70
 
 
 
$2.700 / (0.12 – 0.06)
$53.80
 
Dividends per share are calculated by multiplying the total dividends by the number of shares outstanding, which may be found in the annual report. A dividend per share is calculated as follows:
Dividends per share = total dividends / outstanding shares.
Dividends per annum 30,000
Lowe’s and Home Depot’s dividends per share are the same.
Total dividends ÷ shares unsettled = dividends for each share.
Yearly Dividends 30,000
Number of Shares= 5800
Dividends Per Share of Home Depot & Lowes=30,000/5800
=5.172
Calculating the stock price for the real chosen business is a simple process.
Some business managers may wish to know a firm’s intrinsic share value because they may want to buy the company or search for vulnerabilities in their rivals. As a way to keep shareholders pleased and fend off takeover attempts, the management of all companies wants to maximize their company’s share price. It doesn’t imply that a stock is desirable because it has a low P/E ratio. There may be several causes for the reduced pricing, including decreased demand for their goods, client losses, managerial errors, or a long-term downturn in the firm.
Dividends per share = Stock value (Stockholder’s rate of return – dividend growth rate)
Value of stock = $2.70/(0.12 – 0.08) = $68
References
Dalton, F., & Pointon, J. (2019). An international study of dividend policy: Some preliminary results. In Issues in Accounting and Finance (pp. 241-256). Routledge.
Dhandra, T. K. (2019). Achieving triple dividend through mindfulness: More sustainable consumption, less unsustainable consumption, and more life satisfaction. Ecological economics, 161, 83-90.
Fischhendler, I., & Tenenboim-Weinblatt, K. (2019). The peace dividend as an intangible benefit in mega-project justification: a comparative content analysis of the dead sea-red sea Canal. Geoforum, 101, 141-149.
Singh, N. P., & Tandon, A. (2019). The effect of dividend policy on stock price: Evidence from the Indian Market. Asia-Pacific Journal of Management Research and Innovation, 15(1-2), 7-15.