Stock Analysis on Net

Procter & Gamble Co. (NYSE:PG)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Procter & Gamble Co., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.25%
01 FCFE0 16,723
1 FCFE1 18,423 = 16,723 × (1 + 10.17%) 17,019
2 FCFE2 19,999 = 18,423 × (1 + 8.55%) 17,066
3 FCFE3 21,386 = 19,999 × (1 + 6.94%) 16,859
4 FCFE4 22,525 = 21,386 × (1 + 5.32%) 16,403
5 FCFE5 23,360 = 22,525 × (1 + 3.71%) 15,714
5 Terminal value (TV5) 533,300 = 23,360 × (1 + 3.71%) ÷ (8.25%3.71%) 358,754
Intrinsic value of Procter & Gamble Co. common stock 441,815
 
Intrinsic value of Procter & Gamble Co. common stock (per share) $187.76
Current share price $162.25

Based on: 10-K (reporting date: 2023-06-30).

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)

Microsoft Excel
Assumptions
Rate of return on LT Treasury Composite1 RF 4.42%
Expected rate of return on market portfolio2 E(RM) 13.61%
Systematic risk of Procter & Gamble Co. common stock βPG 0.42
 
Required rate of return on Procter & Gamble Co. common stock3 rPG 8.25%

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 rPG = RF + βPG [E(RM) – RF]
= 4.42% + 0.42 [13.61%4.42%]
= 8.25%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Procter & Gamble Co., PRAT model

Microsoft Excel
Average Jun 30, 2023 Jun 30, 2022 Jun 30, 2021 Jun 30, 2020 Jun 30, 2019 Jun 30, 2018
Selected Financial Data (US$ in millions)
Dividends and dividend equivalents, common 8,742 8,514 8,020 7,551 7,256 7,057
Dividends and dividend equivalents, preferred 282 281 271 263 263 265
Net earnings attributable to Procter & Gamble (P&G) 14,653 14,742 14,306 13,027 3,897 9,750
Net sales 82,006 80,187 76,118 70,950 67,684 66,832
Total assets 120,829 117,208 119,307 120,700 115,095 118,310
Shareholders’ equity attributable to Procter & Gamble 46,777 46,589 46,378 46,521 47,194 52,293
Financial Ratios
Retention rate1 0.39 0.41 0.43 0.41 -1.00 0.26
Profit margin2 17.52% 18.03% 18.44% 17.99% 5.37% 14.19%
Asset turnover3 0.68 0.68 0.64 0.59 0.59 0.56
Financial leverage4 2.58 2.52 2.57 2.59 2.44 2.26
Averages
Retention rate 0.38
Profit margin 17.24%
Asset turnover 0.62
Financial leverage 2.49
 
FCFE growth rate (g)5 10.17%

Based on: 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30).

2023 Calculations

1 Retention rate = (Net earnings attributable to Procter & Gamble (P&G) – Dividends and dividend equivalents, common – Dividends and dividend equivalents, preferred) ÷ (Net earnings attributable to Procter & Gamble (P&G) – Dividends and dividend equivalents, preferred)
= (14,6538,742282) ÷ (14,653282)
= 0.39

2 Profit margin = 100 × (Net earnings attributable to Procter & Gamble (P&G) – Dividends and dividend equivalents, preferred) ÷ Net sales
= 100 × (14,653282) ÷ 82,006
= 17.52%

3 Asset turnover = Net sales ÷ Total assets
= 82,006 ÷ 120,829
= 0.68

4 Financial leverage = Total assets ÷ Shareholders’ equity attributable to Procter & Gamble
= 120,829 ÷ 46,777
= 2.58

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.38 × 17.24% × 0.62 × 2.49
= 10.17%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (381,778 × 8.25%16,723) ÷ (381,778 + 16,723)
= 3.71%

where:
Equity market value0 = current market value of Procter & Gamble Co. common stock (US$ in millions)
FCFE0 = the last year Procter & Gamble Co. free cash flow to equity (US$ in millions)
r = required rate of return on Procter & Gamble Co. common stock


FCFE growth rate (g) forecast

Procter & Gamble Co., H-model

Microsoft Excel
Year Value gt
1 g1 10.17%
2 g2 8.55%
3 g3 6.94%
4 g4 5.32%
5 and thereafter g5 3.71%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 10.17% + (3.71%10.17%) × (2 – 1) ÷ (5 – 1)
= 8.55%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.17% + (3.71%10.17%) × (3 – 1) ÷ (5 – 1)
= 6.94%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.17% + (3.71%10.17%) × (4 – 1) ÷ (5 – 1)
= 5.32%