# Thermo Fisher Scientific Inc. (NYSE:TMO)

## 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)

Thermo Fisher Scientific Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 13.53%
0 DPS01 0.76
1 DPS1 0.83 = 0.76 × (1 + 9.06%) 0.73
2 DPS2 0.91 = 0.83 × (1 + 10.12%) 0.71
3 DPS3 1.01 = 0.91 × (1 + 11.19%) 0.69
4 DPS4 1.14 = 1.01 × (1 + 12.26%) 0.69
5 DPS5 1.29 = 1.14 × (1 + 13.33%) 0.68
5 Terminal value (TV5) 728.90 = 1.29 × (1 + 13.33%) ÷ (13.53%13.33%) 386.51
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock (per share) \$390.01
Current share price \$429.05

Based on: 10-K (filing date: 2020-02-26).

1 DPS0 = Sum of the last year dividends per share of Thermo Fisher Scientific 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 1.27% Expected rate of return on market portfolio2 E(RM) 12.08% Systematic risk of Thermo Fisher Scientific Inc.’s common stock βTMO 1.13 Required rate of return on Thermo Fisher Scientific Inc.’s common stock3 rTMO 13.53%

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 rTMO = RF + βTMO [E(RM) – RF]
= 1.27% + 1.13 [12.08%1.27%]
= 13.53%

### Dividend Growth Rate (g)

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

Thermo Fisher Scientific Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Dividends declared 304  274  238  237  240
Net income 3,696  2,938  2,225  2,022  1,975
Revenues 25,542  24,358  20,918  18,274  16,965
Total assets 58,381  56,232  56,669  45,908  40,889
Shareholders’ equity 29,675  27,586  25,413  21,539  21,350
Financial Ratios
Retention rate1 0.92 0.91 0.89 0.88 0.88
Profit margin2 14.47% 12.06% 10.64% 11.06% 11.64%
Asset turnover3 0.44 0.43 0.37 0.40 0.41
Financial leverage4 1.97 2.04 2.23 2.13 1.92
Averages
Retention rate 0.90
Profit margin 11.98%
Asset turnover 0.41
Financial leverage 2.06

Dividend growth rate (g)5 9.06%

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-28), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-25).

2019 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (3,696304) ÷ 3,696 = 0.92

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 3,696 ÷ 25,542 = 14.47%

3 Asset turnover = Revenues ÷ Total assets
= 25,542 ÷ 58,381 = 0.44

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 58,381 ÷ 29,675 = 1.97

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.90 × 11.98% × 0.41 × 2.06 = 9.06%

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$429.05 × 13.53%\$0.76) ÷ (\$429.05 + \$0.76) = 13.33%

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

#### Dividend growth rate (g) forecast

Thermo Fisher Scientific Inc., H-model

Year Value gt
1 g1 9.06%
2 g2 10.12%
3 g3 11.19%
4 g4 12.26%
5 and thereafter g5 13.33%

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)
= 9.06% + (13.33%9.06%) × (2 – 1) ÷ (5 – 1) = 10.12%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.06% + (13.33%9.06%) × (3 – 1) ÷ (5 – 1) = 11.19%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.06% + (13.33%9.06%) × (4 – 1) ÷ (5 – 1) = 12.26%