## 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)

**3M Co., dividends per share (DPS) forecast**

US$

Year | Value | DPS_{t} or Terminal value (TV_{t}) |
Calculation | Present value at 12.97% |
---|---|---|---|---|

0 | DPS_{0}^{1} |
5.76 | ||

1 | DPS_{1} |
6.94 | = 5.76 × (1 + 20.47%) | 6.14 |

2 | DPS_{2} |
8.16 | = 6.94 × (1 + 17.65%) | 6.40 |

3 | DPS_{3} |
9.37 | = 8.16 × (1 + 14.82%) | 6.50 |

4 | DPS_{4} |
10.50 | = 9.37 × (1 + 12.00%) | 6.45 |

5 | DPS_{5} |
11.46 | = 10.50 × (1 + 9.18%) | 6.23 |

5 | Terminal value (TV_{5}) |
330.06 | = 11.46 × (1 + 9.18%) ÷ (12.97% – 9.18%) | 179.38 |

Intrinsic value of 3M Co.’s common stock (per share) | $211.10 | |||

Current share price | $165.86 |

Based on: 10-K (filing date: 2020-02-06).

^{1} DPS_{0} = Sum of the last year dividends per share of 3M Co.’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 Composite^{1} |
R_{F} |
1.25% |

Expected rate of return on market portfolio^{2} |
E(R)_{M} |
11.79% |

Systematic risk of 3M Co.’s common stock | β_{MMM} |
1.11 |

Required rate of return on 3M Co.’s common stock^{3} |
r_{MMM} |
12.97% |

^{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).

^{2} See details »

^{3} *r*_{MMM} = *R _{F}* + β

_{MMM}[

*E*(

*R*) –

_{M}*R*]

_{F}= 1.25% + 1.11 [11.79% – 1.25%]

= 12.97%

### Dividend Growth Rate (*g*)

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

**3M Co., PRAT model**

Based on: 10-K (filing date: 2020-02-06), 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11).

*2019 Calculations*

^{1} Retention rate = (Net income attributable to 3M – Dividends declared) ÷ Net income attributable to 3M

= (4,570 – 3,316) ÷ 4,570 = 0.27

^{2} Profit margin = 100 × Net income attributable to 3M ÷ Net sales

= 100 × 4,570 ÷ 32,136 = 14.22%

^{3} Asset turnover = Net sales ÷ Total assets

= 32,136 ÷ 44,659 = 0.72

^{4} Financial leverage = Total assets ÷ Total 3M Company shareholders’ equity

= 44,659 ÷ 10,063 = 4.44

^{5} *g* = Retention rate × Profit margin × Asset turnover × Financial leverage

= 0.43 × 15.73% × 0.86 × 3.49 = 20.47%

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

*g* = 100 × (*P*_{0} × *r* – *D*_{0}) ÷ (*P*_{0} + *D*_{0})

= 100 × ($165.86 × 12.97% – $5.76) ÷ ($165.86 + $5.76) = **9.18%**

where:

*P*_{0} = current price of share of 3M Co.’s common stock

*D*_{0} = the last year dividends per share of 3M Co.’s common stock

*r* = required rate of return on 3M Co.’s common stock

#### Dividend growth rate (*g*) forecast

**3M Co., H-model**

Year | Value | g_{t} |
---|---|---|

1 | g_{1} |
20.47% |

2 | g_{2} |
17.65% |

3 | g_{3} |
14.82% |

4 | g_{4} |
12.00% |

5 and thereafter | g_{5} |
9.18% |

where:

*g*_{1} is implied by PRAT model

*g*_{5} is implied by Gordon growth model

*g*_{2}, *g*_{3} and *g*_{4} are calculated using linear interpoltion between *g*_{1} and *g*_{5}

*Calculations*

*g*_{2} = *g*_{1} + (*g*_{5} – *g*_{1}) × (2 – 1) ÷ (5 – 1)

= 20.47% + (9.18% – 20.47%) × (2 – 1) ÷ (5 – 1) = 17.65%

*g*_{3} = *g*_{1} + (*g*_{5} – *g*_{1}) × (3 – 1) ÷ (5 – 1)

= 20.47% + (9.18% – 20.47%) × (3 – 1) ÷ (5 – 1) = 14.82%

*g*_{4} = *g*_{1} + (*g*_{5} – *g*_{1}) × (4 – 1) ÷ (5 – 1)

= 20.47% + (9.18% – 20.47%) × (4 – 1) ÷ (5 – 1) = 12.00%