# Procter & Gamble Co. (PG) | 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)

Procter & Gamble Co., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 6.80%
0 DPS01 2.14
1 DPS1 2.35 = 2.14 × (1 + 10.15%) 2.20
2 DPS2 2.56 = 2.35 × (1 + 8.61%) 2.24
3 DPS3 2.74 = 2.56 × (1 + 7.06%) 2.25
4 DPS4 2.89 = 2.74 × (1 + 5.52%) 2.22
5 DPS5 3.00 = 2.89 × (1 + 3.98%) 2.16
5 Terminal value (TV5) 110.59 = 3.00 × (1 + 3.98%) ÷ (6.80% – 3.98%) 79.59
Intrinsic value of 's common stock (per share) \$90.67
Current share price \$78.70

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 2.81% Expected rate of return on market portfolio2 E(RM) 13.12% Systematic risk (β) of 's common stock βPG 0.39 Required rate of return on 's common stock3 rPG 6.80%

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 rPG = RF + βPG [E(RM) – RF]
= 2.81% + 0.39 [13.12% – 2.81%]
= 6.80%

## Dividend Growth Rate (g)

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

Procter & Gamble Co., PRAT model

Average Jun 30, 2012 Jun 30, 2011 Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Jun 30, 2007
Selected Financial Data (USD \$ in millions)
Dividends to shareholders, common   5,883  5,534  5,239  4,852  4,479  4,048
Dividends to shareholders, preferred, net of tax benefits   256  233  219  192  176  161
Net earnings attributable to Procter & Gamble   10,756  11,797  12,736  13,436  12,075  10,340
Net sales   83,680  82,559  78,938  79,029  83,503  76,476
Total assets   132,244  138,354  128,172  134,833  143,992  138,014
Shareholders' equity attributable to parent   63,439  67,640  61,115  63,099  69,494  66,760
Ratios
Retention rate1   0.44 0.52 0.58 0.63 0.62 0.60
Profit margin2   12.55% 14.01% 15.86% 16.76% 14.25% 13.31%
Asset turnover3   0.63 0.60 0.62 0.59 0.58 0.55
Financial leverage4   2.08 2.05 2.10 2.14 2.07 2.07
Averages
Retention rate 0.57
Profit margin 14.45%
Asset turnover 0.59
Financial leverage 2.08

Dividend growth rate (g)5 10.15%

2012 Calculations

1 Retention rate = (Net earnings attributable to Procter & Gamble – Dividends to shareholders, common – Dividends to shareholders, preferred, net of tax benefits) ÷ (Net earnings attributable to Procter & Gamble – Dividends to shareholders, preferred, net of tax benefits)
= (10,756 – 5,883 – 256) ÷ (10,756 – 256) = 0.44

2 Profit margin = 100 × (Net earnings attributable to Procter & Gamble – Dividends to shareholders, preferred, net of tax benefits) ÷ Net sales
= 100 × (10,756 – 256) ÷ 83,680 = 12.55%

3 Asset turnover = Net sales ÷ Total assets
= 83,680 ÷ 132,244 = 0.63

4 Financial leverage = Total assets ÷ Shareholders' equity attributable to parent
= 132,244 ÷ 63,439 = 2.08

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.57 × 14.45% × 0.59 × 2.08 = 10.15%

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$78.70 × 6.80% – \$2.14) ÷ (\$78.70 + \$2.14) = 3.98%

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

Procter & Gamble Co., H-model

Year Value gt
1 g1 10.15%
2 g2 8.61%
3 g3 7.06%
4 g4 5.52%
5 and thereafter g5 3.98%

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)
= 10.15% + (3.98% – 10.15%) × (2 – 1) ÷ (5 – 1) = 8.61%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.15% + (3.98% – 10.15%) × (3 – 1) ÷ (5 – 1) = 7.06%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.15% + (3.98% – 10.15%) × (4 – 1) ÷ (5 – 1) = 5.52%