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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)

Emerson Electric Co., dividends per share (DPS) forecast

USD $

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Year Value DPSt or Terminal value (TVt) Calculation Present value at 14.37%
0 DPS01 1.94
1 DPS1 2.11 = 1.94 × (1 + 8.65%) 1.84
2 DPS2 2.30 = 2.11 × (1 + 9.17%) 1.76
3 DPS3 2.52 = 2.30 × (1 + 9.68%) 1.69
4 DPS4 2.78 = 2.52 × (1 + 10.20%) 1.63
5 DPS5 3.08 = 2.78 × (1 + 10.71%) 1.57
5 Terminal value (TV5) 93.20 = 3.08 × (1 + 10.71%) ÷ (14.37%10.71%) 47.62
Intrinsic value of Emerson's common stock (per share) $56.11
Current share price $58.72

Based on: 10-K (filing date: 2018-11-19).

1 DPS0 = Sum of last year dividends per share of Emerson'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 3.06%
Expected rate of return on market portfolio2 E(RM) 12.49%
Systematic risk (β) of Emerson's common stock βEMR 1.20
Required rate of return on Emerson's common stock3 rEMR 14.37%

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 rEMR = RF + βEMR [E(RM) – RF]
= 3.06% + 1.20 [12.49%3.06%]
= 14.37%


Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Emerson Electric Co., PRAT model

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Average Sep 30, 2018 Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013
Selected Financial Data (USD $ in millions)
Dividends paid 1,229  1,239  1,227  1,269  1,210  1,181 
Net earnings common stockholders 2,203  1,518  1,635  2,710  2,147  2,004 
Net sales 17,408  15,264  14,522  22,304  24,537  24,669 
Total assets 20,390  19,589  21,743  22,088  24,177  24,711 
Common stockholders' equity 8,947  8,718  7,568  8,081  10,119  10,585 
Ratios
Retention rate1 0.44 0.18 0.25 0.53 0.44 0.41
Profit margin2 12.66% 9.94% 11.26% 12.15% 8.75% 8.12%
Asset turnover3 0.85 0.78 0.67 1.01 1.01 1.00
Financial leverage4 2.28 2.25 2.87 2.73 2.39 2.33
Averages
Retention rate 0.38
Profit margin 10.48%
Asset turnover 0.89
Financial leverage 2.48
Dividend growth rate (g)5 8.65%

Based on: 10-K (filing date: 2018-11-19), 10-K (filing date: 2017-11-20), 10-K (filing date: 2016-11-16), 10-K (filing date: 2015-11-18), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-19).

2018 Calculations

1 Retention rate = (Net earnings common stockholders – Dividends paid) ÷ Net earnings common stockholders
= (2,2031,229) ÷ 2,203 = 0.44

2 Profit margin = 100 × Net earnings common stockholders ÷ Net sales
= 100 × 2,203 ÷ 17,408 = 12.66%

3 Asset turnover = Net sales ÷ Total assets
= 17,408 ÷ 20,390 = 0.85

4 Financial leverage = Total assets ÷ Common stockholders' equity
= 20,390 ÷ 8,947 = 2.28

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.38 × 10.48% × 0.89 × 2.48 = 8.65%


Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × ($58.72 × 14.37% – $1.94) ÷ ($58.72 + $1.94) = 10.71%

where:
P0 = current price of share of Emerson's common stock
D0 = last year dividends per share of Emerson's common stock
r = required rate of return on Emerson's common stock


Dividend growth rate (g) forecast

Emerson Electric Co., H-model

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Year Value gt
1 g1 8.65%
2 g2 9.17%
3 g3 9.68%
4 g4 10.20%
5 and thereafter g5 10.71%

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)
= 8.65% + (10.71%8.65%) × (2 – 1) ÷ (5 – 1) = 9.17%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.65% + (10.71%8.65%) × (3 – 1) ÷ (5 – 1) = 9.68%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.65% + (10.71%8.65%) × (4 – 1) ÷ (5 – 1) = 10.20%