Amgen Inc. (AMGN)

Dividend Discount Model (DDM)

Difficulty: Intermediate

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 Summary)

Amgen Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 15.36%
0 DPS01 5.28
1 DPS1 5.74 = 5.28 × (1 + 8.66%) 4.97
2 DPS2 6.29 = 5.74 × (1 + 9.59%) 4.72
3 DPS3 6.95 = 6.29 × (1 + 10.53%) 4.53
4 DPS4 7.75 = 6.95 × (1 + 11.47%) 4.37
5 DPS5 8.71 = 7.75 × (1 + 12.41%) 4.26
5 Terminal value (TV5) 331.16 = 8.71 × (1 + 12.41%) ÷ (15.36%12.41%) 162.08
Intrinsic value of Amgen Inc.’s common stock (per share) \$184.94
Current share price \$200.80

Based on: 10-K (filing date: 2019-02-13).

1 DPS0 = Sum of the last year dividends per share of Amgen Inc.’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 2.13% Expected rate of return on market portfolio2 E(RM) 11.63% Systematic risk of Amgen Inc.’s common stock βAMGN 1.39 Required rate of return on Amgen Inc.’s common stock3 rAMGN 15.36%

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).

3 rAMGN = RF + βAMGN [E(RM) – RF]
= 2.13% + 1.39 [11.63%2.13%]
= 15.36%

Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Amgen Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared on common stock 3,482  3,487  3,120  2,548  1,995
Net income 8,394  1,979  7,722  6,939  5,158
Product sales 22,533  21,795  21,892  20,944  19,327
Total assets 66,416  79,954  77,626  71,576  69,009
Stockholders’ equity 12,500  25,241  29,875  28,083  25,778
Financial Ratios
Retention rate1 0.59 -0.76 0.60 0.63 0.61
Profit margin2 37.25% 9.08% 35.27% 33.13% 26.69%
Asset turnover3 0.34 0.27 0.28 0.29 0.28
Financial leverage4 5.31 3.17 2.60 2.55 2.68
Averages
Retention rate 0.33
Profit margin 28.28%
Asset turnover 0.28
Financial leverage 3.26

Dividend growth rate (g)5 8.66%

Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-19).

2018 Calculations

1 Retention rate = (Net income – Dividends declared on common stock) ÷ Net income
= (8,3943,482) ÷ 8,394 = 0.59

2 Profit margin = 100 × Net income ÷ Product sales
= 100 × 8,394 ÷ 22,533 = 37.25%

3 Asset turnover = Product sales ÷ Total assets
= 22,533 ÷ 66,416 = 0.34

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 66,416 ÷ 12,500 = 5.31

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.33 × 28.28% × 0.28 × 3.26 = 8.66%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$200.80 × 15.36% – \$5.28) ÷ (\$200.80 + \$5.28) = 12.41%

where:
P0 = current price of share of Amgen Inc.’s common stock
D0 = the last year dividends per share of Amgen Inc.’s common stock
r = required rate of return on Amgen Inc.’s common stock

Dividend growth rate (g) forecast

Amgen Inc., H-model

Year Value gt
1 g1 8.66%
2 g2 9.59%
3 g3 10.53%
4 g4 11.47%
5 and thereafter g5 12.41%

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)
= 8.66% + (12.41%8.66%) × (2 – 1) ÷ (5 – 1) = 9.59%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.66% + (12.41%8.66%) × (3 – 1) ÷ (5 – 1) = 10.53%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.66% + (12.41%8.66%) × (4 – 1) ÷ (5 – 1) = 11.47%