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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)

Walt Disney Co., dividends per share (DPS) forecast

USD $

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Year Value DPSt or Terminal value (TVt) Calculation Present value at 14.23%
0 DPS01 1.68
1 DPS1 1.92 = 1.68 × (1 + 14.27%) 1.68
2 DPS2 2.19 = 1.92 × (1 + 13.85%) 1.68
3 DPS3 2.48 = 2.19 × (1 + 13.43%) 1.66
4 DPS4 2.80 = 2.48 × (1 + 13.01%) 1.65
5 DPS5 3.15 = 2.80 × (1 + 12.59%) 1.62
5 Terminal value (TV5) 216.37 = 3.15 × (1 + 12.59%) ÷ (14.23%12.59%) 111.27
Intrinsic value of Walt Disney Co.’s common stock (per share) $119.55
Current share price $115.25

Based on: 10-K (filing date: 2018-11-21).

1 DPS0 = Sum of last year dividends per share of Walt Disney Co.’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 2.94%
Expected rate of return on market portfolio2 E(RM) 11.63%
Systematic risk (β) of Walt Disney Co.’s common stock βDIS 1.30
Required rate of return on Walt Disney Co.’s common stock3 rDIS 14.23%

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 rDIS = RF + βDIS [E(RM) – RF]
= 2.94% + 1.30 [11.63%2.94%]
= 14.23%


Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Walt Disney Co., PRAT model

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Average Sep 29, 2018 Sep 30, 2017 Oct 1, 2016 Oct 3, 2015 Sep 27, 2014 Sep 28, 2013
Selected Financial Data (USD $ in millions)
Dividends 2,515  2,445  2,313  3,063  1,508  1,324 
Net income attributable to The Walt Disney Company (Disney) 12,598  8,980  9,391  8,382  7,501  6,136 
Revenues 59,434  55,137  55,632  52,465  48,813  45,041 
Total assets 98,598  95,789  92,033  88,182  84,186  81,241 
Total Disney Shareholder’s equity 48,773  41,315  43,265  44,525  44,958  45,429 
Ratios
Retention rate1 0.80 0.73 0.75 0.63 0.80 0.78
Profit margin2 21.20% 16.29% 16.88% 15.98% 15.37% 13.62%
Asset turnover3 0.60 0.58 0.60 0.59 0.58 0.55
Financial leverage4 2.02 2.32 2.13 1.98 1.87 1.79
Averages
Retention rate 0.77
Profit margin 15.63%
Asset turnover 0.59
Financial leverage 2.02
Dividend growth rate (g)5 14.27%

Based on: 10-K (filing date: 2018-11-21), 10-K (filing date: 2017-11-22), 10-K (filing date: 2016-11-23), 10-K (filing date: 2015-11-25), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-20).

2018 Calculations

1 Retention rate = (Net income attributable to The Walt Disney Company (Disney) – Dividends) ÷ Net income attributable to The Walt Disney Company (Disney)
= (12,5982,515) ÷ 12,598 = 0.80

2 Profit margin = 100 × Net income attributable to The Walt Disney Company (Disney) ÷ Revenues
= 100 × 12,598 ÷ 59,434 = 21.20%

3 Asset turnover = Revenues ÷ Total assets
= 59,434 ÷ 98,598 = 0.60

4 Financial leverage = Total assets ÷ Total Disney Shareholder’s equity
= 98,598 ÷ 48,773 = 2.02

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.77 × 15.63% × 0.59 × 2.02 = 14.27%


Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × ($115.25 × 14.23% – $1.68) ÷ ($115.25 + $1.68) = 12.59%

where:
P0 = current price of share of Walt Disney Co.’s common stock
D0 = last year dividends per share of Walt Disney Co.’s common stock
r = required rate of return on Walt Disney Co.’s common stock


Dividend growth rate (g) forecast

Walt Disney Co., H-model

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Year Value gt
1 g1 14.27%
2 g2 13.85%
3 g3 13.43%
4 g4 13.01%
5 and thereafter g5 12.59%

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)
= 14.27% + (12.59%14.27%) × (2 – 1) ÷ (5 – 1) = 13.85%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.27% + (12.59%14.27%) × (3 – 1) ÷ (5 – 1) = 13.43%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.27% + (12.59%14.27%) × (4 – 1) ÷ (5 – 1) = 13.01%