# Ecolab Inc. (NYSE:ECL)

## 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)

Ecolab Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 9.93%
0 DPS01 1.85
1 DPS1 2.07 = 1.85 × (1 + 11.63%) 1.88
2 DPS2 2.29 = 2.07 × (1 + 10.95%) 1.90
3 DPS3 2.53 = 2.29 × (1 + 10.27%) 1.90
4 DPS4 2.77 = 2.53 × (1 + 9.58%) 1.90
5 DPS5 3.02 = 2.77 × (1 + 8.90%) 1.88
5 Terminal value (TV5) 319.48 = 3.02 × (1 + 8.90%) ÷ (9.93%8.90%) 199.03
Intrinsic value of Ecolab Inc.’s common stock (per share) \$208.48
Current share price \$196.03

Based on: 10-K (filing date: 2020-02-28).

1 DPS0 = Sum of the last year dividends per share of Ecolab 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 1.22% Expected rate of return on market portfolio2 E(RM) 12.07% Systematic risk of Ecolab Inc.’s common stock βECL 0.80 Required rate of return on Ecolab Inc.’s common stock3 rECL 9.93%

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 rECL = RF + βECL [E(RM) – RF]
= 1.22% + 0.80 [12.07%1.22%]
= 9.93%

### Dividend Growth Rate (g)

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

Ecolab Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in thousands)
Cash dividends declared 533,100  487,600  439,900  414,900  396,900
Net income attributable to Ecolab 1,558,900  1,429,100  1,508,400  1,229,600  1,002,100
Net sales 14,906,300  14,668,200  13,838,300  13,152,800  13,545,100
Total assets 20,869,100  20,074,500  19,962,400  18,330,200  18,641,700
Total Ecolab shareholders’ equity 8,685,300  8,003,200  7,618,500  6,901,100  6,909,900
Financial Ratios
Retention rate1 0.66 0.66 0.71 0.66 0.60
Profit margin2 10.46% 9.74% 10.90% 9.35% 7.40%
Asset turnover3 0.71 0.73 0.69 0.72 0.73
Financial leverage4 2.40 2.51 2.62 2.66 2.70
Averages
Retention rate 0.66
Profit margin 9.57%
Asset turnover 0.72
Financial leverage 2.58

Dividend growth rate (g)5 11.63%

Based on: 10-K (filing date: 2020-02-28), 10-K (filing date: 2019-03-01), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26).

2019 Calculations

1 Retention rate = (Net income attributable to Ecolab – Cash dividends declared) ÷ Net income attributable to Ecolab
= (1,558,900533,100) ÷ 1,558,900 = 0.66

2 Profit margin = 100 × Net income attributable to Ecolab ÷ Net sales
= 100 × 1,558,900 ÷ 14,906,300 = 10.46%

3 Asset turnover = Net sales ÷ Total assets
= 14,906,300 ÷ 20,869,100 = 0.71

4 Financial leverage = Total assets ÷ Total Ecolab shareholders’ equity
= 20,869,100 ÷ 8,685,300 = 2.40

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.66 × 9.57% × 0.72 × 2.58 = 11.63%

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$196.03 × 9.93%\$1.85) ÷ (\$196.03 + \$1.85) = 8.90%

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

#### Dividend growth rate (g) forecast

Ecolab Inc., H-model

Year Value gt
1 g1 11.63%
2 g2 10.95%
3 g3 10.27%
4 g4 9.58%
5 and thereafter g5 8.90%

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)
= 11.63% + (8.90%11.63%) × (2 – 1) ÷ (5 – 1) = 10.95%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.63% + (8.90%11.63%) × (3 – 1) ÷ (5 – 1) = 10.27%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.63% + (8.90%11.63%) × (4 – 1) ÷ (5 – 1) = 9.58%