In part one of this series of valuing dividends we looked at a simple Dividend Discount Model to understand the current share price of TeliaSonera, a telecommunications company that pays out a high dividend yield.
The assumptions required in this model, assured dividend payout and known dividend growth to eternity make this model in my eyes just slightly limited in its application! How can you seriously predict the dividend growth to infinity?? The less said about a company (or even the universe) existing for infinite amount of time the better!
Clearly we need to shorten the timeline....and dramatically. There are some ways around this but of course these modified models introduce their own assumptions. One way is to predict the dividends just a few years out, say for example 3 years, and then sell the stock at a predetermined price.
We then discount the sum of these dividends and the proceeds of stock sale at a certain discount rate. This is driven by the risk of investment and partly judgemental. Would I prefer $100 today or $105 next year? Perhaps then $110?
In the example below I have chosen 9%, for simplicities sake let's just say I like my money and the number nine! You are welcome to choose a higher or lower value, that's the beauty of the markets.
In example one (yellow) we have a 2.85 kr dividend being paid out for three years (i.e. no growth) and then sell the stock at today's price of 48kr. The sum of those pay outs and sale is discounted to give a present value. So for example the year 1 dividend is worth 2.85/1.09^1 which is 2.61kr, the year 2 dividend is 2.85/1.09^2= 2.40 and so forth.
As you can see the total price in today's money is 44kr, around 8% less than the current price. The second example (blue) has the dividend growing 5% each year but that doesn't really change the valuation at 45kr. Clearly over this relatively short period of time it is the selling price which drives the value.
As you can imagine one can modify the growth rate, discount rate and selling price ad ifinitum until you get a price you wish. The last example shows what selling price would be required in combination with 5% dividend growth and 9% discount rate i.e. 53kr to get a present value of around 48kr per share. This is now around 10% above the current market price.
Who knows what the future holds for TeliaSonera, maybe it will raise it's dividend in the near future, maybe it won't. If you value the company solely on its dividend and ignore other ways it may create value such as additional cash flow, reinvestment etc then it doesn't look a screaming buy.
However, let's change our mindset regarding this trade. We could be an optimist and conclude the stock may just be reasonably valued based on it's dividend and has upside potential as anything else it may produce would be a bonus.
Inga kommentarer:
Skicka en kommentar