## Dividend Discount Model (DDM)

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)

**Lowe’s Cos. Inc., dividends per share (DPS) forecast**

US$

Year | Value | DPS_{t} or Terminal value (TV_{t}) |
Calculation | Present value at 14.37% |
---|---|---|---|---|

0 | DPS_{0}^{1} |
2.30 | ||

1 | DPS_{1} |
4.07 | = 2.30 × (1 + 76.85%) | 3.56 |

2 | DPS_{2} |
6.55 | = 4.07 × (1 + 60.92%) | 5.00 |

3 | DPS_{3} |
9.49 | = 6.55 × (1 + 44.98%) | 6.34 |

4 | DPS_{4} |
12.25 | = 9.49 × (1 + 29.04%) | 7.16 |

5 | DPS_{5} |
13.85 | = 12.25 × (1 + 13.11%) | 7.08 |

5 | Terminal value (TV_{5}) |
1,236.60 | = 13.85 × (1 + 13.11%) ÷ (14.37% – 13.11%) | 631.82 |

Intrinsic value of Lowe’s Cos. Inc.’s common stock (per share) | $660.95 | |||

Current share price | $205.34 |

Based on: 10-K (filing date: 2021-03-22).

^{1} DPS_{0} = Sum of the last year dividends per share of Lowe’s Cos. 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 Composite^{1} |
R_{F} |
2.23% |

Expected rate of return on market portfolio^{2} |
E(R)_{M} |
11.74% |

Systematic risk of Lowe’s Cos. Inc.’s common stock | β_{LOW} |
1.28 |

Required rate of return on Lowe’s Cos. Inc.’s common stock^{3} |
r_{LOW} |
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).

^{2} See details »

^{3} *r*_{LOW} = *R _{F}* + β

_{LOW}[

*E*(

*R*) –

_{M}*R*]

_{F}= 2.23% + 1.28 [11.74% – 2.23%]

= 14.37%

### Dividend Growth Rate (*g*)

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

**Lowe’s Cos. Inc., PRAT model**

Based on: 10-K (filing date: 2021-03-22), 10-K (filing date: 2020-03-23), 10-K (filing date: 2019-04-02), 10-K (filing date: 2018-04-02), 10-K (filing date: 2017-04-04), 10-K (filing date: 2016-03-29).

*2021 Calculations*

^{1} Retention rate = (Net earnings – Cash dividends declared) ÷ Net earnings

= (5,835 – 1,724) ÷ 5,835

= 0.70

^{2} Profit margin = 100 × Net earnings ÷ Net sales

= 100 × 5,835 ÷ 89,597

= 6.51%

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

= 89,597 ÷ 46,735

= 1.92

^{4} Financial leverage = Total assets ÷ Shareholders’ equity

= 46,735 ÷ 1,437

= 32.52

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

= 0.63 × 4.96% × 1.89 × 12.91

= 76.85%

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

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

= 100 × ($205.34 × 14.37% – $2.30) ÷ ($205.34 + $2.30)

= **13.11%**

where:

*P*_{0} = current price of share of Lowe’s Cos. Inc.’s common stock

*D*_{0} = the last year dividends per share of Lowe’s Cos. Inc.’s common stock

*r* = required rate of return on Lowe’s Cos. Inc.’s common stock

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

**Lowe’s Cos. Inc., H-model**

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

1 | g_{1} |
76.85% |

2 | g_{2} |
60.92% |

3 | g_{3} |
44.98% |

4 | g_{4} |
29.04% |

5 and thereafter | g_{5} |
13.11% |

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)

= 76.85% + (13.11% – 76.85%) × (2 – 1) ÷ (5 – 1)

= 60.92%

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

= 76.85% + (13.11% – 76.85%) × (3 – 1) ÷ (5 – 1)

= 44.98%

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

= 76.85% + (13.11% – 76.85%) × (4 – 1) ÷ (5 – 1)

= 29.04%