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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)

Altria Group Inc., dividends per share (DPS) forecast

USD $

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Year Value DPSt or Terminal value (TVt) Calculation Present value at 8.61%
0 DPS01 2.54
1 DPS1 3.96 = 2.54 × (1 + 56.04%) 3.65
2 DPS2 5.66 = 3.96 × (1 + 42.83%) 4.80
3 DPS3 7.34 = 5.66 × (1 + 29.62%) 5.73
4 DPS4 8.54 = 7.34 × (1 + 16.40%) 6.14
5 DPS5 8.81 = 8.54 × (1 + 3.19%) 5.83
5 Terminal value (TV5) 167.63 = 8.81 × (1 + 3.19%) ÷ (8.61%3.19%) 110.89
Intrinsic value of Altria Group Inc.’s common stock (per share) $137.04
Current share price $48.31

Based on: 10-K (filing date: 2018-02-27).

1 DPS0 = Sum of last year dividends per share of Altria Group 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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.03%
Expected rate of return on market portfolio2 E(RM) 12.37%
Systematic risk (β) of Altria Group Inc.’s common stock βMO 0.60
Required rate of return on Altria Group Inc.’s common stock3 rMO 8.61%

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

2 See Details »

3 rMO = RF + βMO [E(RM) – RF]
= 3.03% + 0.60 [12.37%3.03%]
= 8.61%


Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Altria Group Inc., PRAT model

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Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Cash dividends declared 4,877  4,590  4,261  3,961  3,683 
Net earnings attributable to Altria Group, Inc. 10,222  14,239  5,241  5,070  4,535 
Net revenues 25,576  25,744  25,434  24,522  24,466 
Total assets 43,202  45,932  32,535  34,475  34,859 
Stockholders’ equity attributable to Altria Group, Inc. 15,377  12,770  2,880  3,014  4,119 
Ratios
Retention rate1 0.52 0.68 0.19 0.22 0.19
Profit margin2 39.97% 55.31% 20.61% 20.68% 18.54%
Asset turnover3 0.59 0.56 0.78 0.71 0.70
Financial leverage4 2.81 3.60 11.30 11.44 8.46
Averages
Retention rate 0.36
Profit margin 31.02%
Asset turnover 0.67
Financial leverage 7.52
Dividend growth rate (g)5 56.04%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-25), 10-K (filing date: 2014-02-26).

2017 Calculations

1 Retention rate = (Net earnings attributable to Altria Group, Inc. – Cash dividends declared) ÷ Net earnings attributable to Altria Group, Inc.
= (10,2224,877) ÷ 10,222 = 0.52

2 Profit margin = 100 × Net earnings attributable to Altria Group, Inc. ÷ Net revenues
= 100 × 10,222 ÷ 25,576 = 39.97%

3 Asset turnover = Net revenues ÷ Total assets
= 25,576 ÷ 43,202 = 0.59

4 Financial leverage = Total assets ÷ Stockholders’ equity attributable to Altria Group, Inc.
= 43,202 ÷ 15,377 = 2.81

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.36 × 31.02% × 0.67 × 7.52 = 56.04%


Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × ($48.31 × 8.61% – $2.54) ÷ ($48.31 + $2.54) = 3.19%

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


Dividend growth rate (g) forecast

Altria Group Inc., H-model

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Year Value gt
1 g1 56.04%
2 g2 42.83%
3 g3 29.62%
4 g4 16.40%
5 and thereafter g5 3.19%

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)
= 56.04% + (3.19%56.04%) × (2 – 1) ÷ (5 – 1) = 42.83%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 56.04% + (3.19%56.04%) × (3 – 1) ÷ (5 – 1) = 29.62%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 56.04% + (3.19%56.04%) × (4 – 1) ÷ (5 – 1) = 16.40%