# Applied Materials Inc. (AMAT)

## Dividend Discount Model (DDM)

Intermediate level

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)

Applied Materials Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 17.26%
0 DPS01 0.82
1 DPS1 0.97 = 0.82 × (1 + 18.79%) 0.83
2 DPS2 1.15 = 0.97 × (1 + 18.01%) 0.84
3 DPS3 1.35 = 1.15 × (1 + 17.22%) 0.84
4 DPS4 1.57 = 1.35 × (1 + 16.44%) 0.83
5 DPS5 1.81 = 1.57 × (1 + 15.65%) 0.82
5 Terminal value (TV5) 130.68 = 1.81 × (1 + 15.65%) ÷ (17.26%15.65%) 58.95
Intrinsic value of Applied Materials Inc.’s common stock (per share) \$63.10
Current share price \$59.05

Based on: 10-K (filing date: 2019-12-13).

1 DPS0 = Sum of the last year dividends per share of Applied Materials 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 1.98% Expected rate of return on market portfolio2 E(RM) 11.24% Systematic risk of Applied Materials Inc.’s common stock βAMAT 1.65 Required rate of return on Applied Materials Inc.’s common stock3 rAMAT 17.26%

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 rAMAT = RF + βAMAT [E(RM) – RF]
= 1.98% + 1.65 [11.24%1.98%]
= 17.26%

### Dividend Growth Rate (g)

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

Applied Materials Inc., PRAT model

Average Oct 27, 2019 Oct 28, 2018 Oct 29, 2017 Oct 30, 2016 Oct 25, 2015 Oct 26, 2014
Selected Financial Data (US\$ in millions)
Dividends 770  694  428  436  482  487
Net income 2,706  3,313  3,434  1,721  1,377  1,072
Net sales 14,608  17,253  14,537  10,825  9,659  9,072
Total assets 19,024  17,773  19,419  14,588  15,308  13,174
Stockholders’ equity 8,214  6,839  9,349  7,217  7,613  7,868
Financial Ratios
Retention rate1 0.72 0.79 0.88 0.75 0.65 0.55
Profit margin2 18.52% 19.20% 23.62% 15.90% 14.26% 11.82%
Asset turnover3 0.77 0.97 0.75 0.74 0.63 0.69
Financial leverage4 2.32 2.60 2.08 2.02 2.01 1.67
Averages
Retention rate 0.72
Profit margin 17.22%
Asset turnover 0.72
Financial leverage 2.12

Dividend growth rate (g)5 18.79%

Based on: 10-K (filing date: 2019-12-13), 10-K (filing date: 2018-12-13), 10-K (filing date: 2017-12-15), 10-K (filing date: 2016-12-15), 10-K (filing date: 2015-12-09), 10-K (filing date: 2014-12-17).

2019 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (2,706770) ÷ 2,706 = 0.72

2 Profit margin = 100 × Net income ÷ Net sales
= 100 × 2,706 ÷ 14,608 = 18.52%

3 Asset turnover = Net sales ÷ Total assets
= 14,608 ÷ 19,024 = 0.77

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 19,024 ÷ 8,214 = 2.32

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.72 × 17.22% × 0.72 × 2.12 = 18.79%

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$59.05 × 17.26% – \$0.82) ÷ (\$59.05 + \$0.82) = 15.65%

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

#### Dividend growth rate (g) forecast

Applied Materials Inc., H-model

Year Value gt
1 g1 18.79%
2 g2 18.01%
3 g3 17.22%
4 g4 16.44%
5 and thereafter g5 15.65%

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)
= 18.79% + (15.65%18.79%) × (2 – 1) ÷ (5 – 1) = 18.01%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 18.79% + (15.65%18.79%) × (3 – 1) ÷ (5 – 1) = 17.22%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 18.79% + (15.65%18.79%) × (4 – 1) ÷ (5 – 1) = 16.44%