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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)
Abbott Laboratories, dividends per share (DPS) forecast
USD $
| Year | Value | DPSt or Terminal value (TVt) | Calculation | Present value at % |
|---|---|---|---|---|
| 0 | DPS01 | |
||
| 1 | DPS1 | |
= × (1 + %) |
|
| 2 | DPS2 | |
= × (1 + %) |
|
| 3 | DPS3 | |
= × (1 + %) |
|
| 4 | DPS4 | |
= × (1 + %) |
|
| 5 | DPS5 | |
= × (1 + %) |
|
| 5 | Terminal value (TV5) | |
= × (1 + %) ÷ (% – %) |
|
| Intrinsic value of Abbott's common stock (per share) | $ |
|||
| Current share price | $ |
|||
1 DPS0 = Sum of last year dividends per share of Abbott'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 | % |
| Expected rate of return on market portfolio2 | E(RM) | % |
| Systematic risk (β) of Abbott's common stock | βABT | |
| Required rate of return on Abbott's common stock3 | rABT | % |
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 rABT = RF + βABT [E(RM) – RF]
= % + [% – %]
= %
Dividend Growth Rate (g)
Dividend growth rate (g) implied by PRAT model
Abbott Laboratories, PRAT model
2017 Calculations
1 Retention rate = (Net earnings – Cash dividends declared on common shares) ÷ Net earnings
= ( – ) ÷ =
2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × ÷ = %
3 Asset turnover = Net sales ÷ Total assets
= ÷ =
4 Financial leverage = Total assets ÷ Total Abbott shareholders' investment
= ÷ =
5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × % × × = %
Dividend growth rate (g) implied by Gordon growth model
g = 100 × (P0 × r – D0) ÷ (P0 + D0)
= 100 × ($ × % – $) ÷ ($ + $) = %
where:
P0 = current price of share of Abbott's common stock
D0 = last year dividends per share of Abbott's common stock
r = required rate of return on Abbott's common stock
Dividend growth rate (g) forecast
Abbott Laboratories, H-model
| Year | Value | gt |
|---|---|---|
| 1 | g1 | % |
| 2 | g2 | % |
| 3 | g3 | % |
| 4 | g4 | % |
| 5 and thereafter | g5 | % |
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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= % + (% – %) × (2 – 1) ÷ (5 – 1) = %
g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= % + (% – %) × (3 – 1) ÷ (5 – 1) = %
g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= % + (% – %) × (4 – 1) ÷ (5 – 1) = %
