# Home Depot Inc. (HD) | Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

## Intrinsic Stock Value (Valuation Summery)

Home Depot Inc., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 9.22%
0 DPS01 1.16
1 DPS1 1.27 = 1.16 × (1 + 9.87%) 1.17
2 DPS2 1.39 = 1.27 × (1 + 9.31%) 1.17
3 DPS3 1.52 = 1.39 × (1 + 8.75%) 1.16
4 DPS4 1.64 = 1.52 × (1 + 8.19%) 1.15
5 DPS5 1.76 = 1.64 × (1 + 7.63%) 1.14
5 Terminal value (TV5) 120.15 = 1.76 × (1 + 7.63%) ÷ (9.22% – 7.63%) 77.32
Intrinsic value of 's common stock (per share) \$83.11
Current share price \$78.99

1 DPS0 = Sum of last year dividends per share of 's common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

## Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.80% Expected rate of return on market portfolio2 E(RM) 13.12% Systematic risk (β) of 's common stock βHD 0.62 Required rate of return on 's common stock3 rHD 9.22%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rHD = RF + βHD [E(RM) – RF]
= 2.80% + 0.62 [13.12% – 2.80%]
= 9.22%

## Dividend Growth Rate (g)

### Dividend growth rate (g) implied by PRAT model

Home Depot Inc., PRAT model

Average Feb 3, 2013 Jan 29, 2012 Jan 30, 2011 Jan 31, 2010 Feb 1, 2009 Feb 3, 2008
Selected Financial Data (USD \$ in millions)
Cash dividends   1,743  1,632  1,569  1,525  1,521  1,709
Net earnings   4,535  3,883  3,338  2,661  2,260  4,395
Net sales   74,754  70,395  67,997  66,176  71,288  77,349
Total assets   41,084  40,518  40,125  40,877  41,164  44,324
Stockholders’ equity   17,777  17,898  18,889  19,393  17,777  17,714
Ratios
Retention rate1   0.62 0.58 0.53 0.43 0.33 0.61
Profit margin2   6.07% 5.52% 4.91% 4.02% 3.17% 5.68%
Asset turnover3   1.82 1.74 1.69 1.62 1.73 1.75
Financial leverage4   2.31 2.26 2.12 2.11 2.32 2.50
Averages
Retention rate 0.52
Profit margin 4.89%
Asset turnover 1.72
Financial leverage 2.27

Dividend growth rate (g)5 9.87%

2013 Calculations

1 Retention rate = (Net earnings – Cash dividends) ÷ Net earnings
= (4,535 – 1,743) ÷ 4,535 = 0.62

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 4,535 ÷ 74,754 = 6.07%

3 Asset turnover = Net sales ÷ Total assets
= 74,754 ÷ 41,084 = 1.82

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 41,084 ÷ 17,777 = 2.31

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.52 × 4.89% × 1.72 × 2.27 = 9.87%

### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$78.99 × 9.22% – \$1.16) ÷ (\$78.99 + \$1.16) = 7.63%

where:
P0 = current price of share of 's common stock
D0 = last year dividends per share of 's common stock
r = required rate of return on 's common stock

### Dividend growth rate (g) forecast

Home Depot Inc., H-model

Year Value gt
1 g1 9.87%
2 g2 9.31%
3 g3 8.75%
4 g4 8.19%
5 and thereafter g5 7.63%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 9.87% + (7.63% – 9.87%) × (2 – 1) ÷ (5 – 1) = 9.31%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.87% + (7.63% – 9.87%) × (3 – 1) ÷ (5 – 1) = 8.75%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.87% + (7.63% – 9.87%) × (4 – 1) ÷ (5 – 1) = 8.19%