Malaysia's richest tycoons and the billions in dividends they earned in the final quarter of 2020

 Bees for the honey

Cows for the milk

And, stocks for the dividends!

KUALA LUMPUR (March 18): Eight of Malaysia's top 10 richest tycoons — based on Forbes' 2020 billionaires list — earned a whopping RM1.99 billion worth of dividends from the recently announced financial results for the quarter ended Dec 31, 2020, based on their known shareholdings in Bursa Malaysia-listed firms.

Among them, Public Bank Bhd founder Tan Sri Dr Teh Hong Piow is expected to receive the biggest dividend payout totalling RM668.18 million from his shareholdings in the bank and insurer LPI Capital Bhd.

Public Bank, the third largest banking group in the country by asset size, declared an interim dividend of 13 sen (payable on March 22) for its fourth quarter of financial year 2020 (4QFY20) ended Dec 31, 2020. Public Bank also undertook a four-for-one bonus share issue to reward shareholders last year, which enlarged the number of Public Bank's outstanding shares to 4.2 billion.

Teh holds a 22.78% stake in Public Bank through his private investment vehicle — Consolidated Teh Holdings Sdn Bhd. He has another direct stake of 0.64%.

LPI Capital, meanwhile, announced a second interim dividend of 44 sen per share for its 4QFY20, which amounted to a payout of RM175.3 million. Based on Teh's 44.15% stake in the company, his share of the dividend payout will be about RM77.39 million.

After Teh is Hong Leong Group's Tan Sri Quek Leng Chan, who is estimated to get RM296.05 million worth of dividends through his holdings in Hong Leong Financial Group Bhd (HLFG) and Hong Leong Bank Bhd (HLB).

HLFG declared an interim dividend of 10.8 sen per share while HLB announced an interim single-tier dividend of 14.78 sen per share. Quek holds a direct interest of 0.47% and an indirect interest of 77.88% in HLFG, while he controls an indirect interest of 64.51% in HLB.

Next is telecommunications tycoon T Ananda Krishnan, who will receive RM276.04 million from his stake in Maxis Bhd and Astro Malaysia Holdings Bhd. Ananda is the largest shareholder in Maxis with an indirectly held 62.34% stake. In Astro, he holds an indirect stake of 41.29%.

Maxis declared a fourth interim dividend of five sen per share in its 4QFY20 ended Dec 31, 2020, while Astro announced a payout of 1.5 sen per share in its 3QFY20 ended Oct 31, 2020.

Ananda also holds a 34.86% stake in Bumi Armada Bhd, Asia's biggest offshore supporting vessel operator. The company, however, did not declare any dividends in 2020.

Robert Kuok's dividend cheque from PPB Group Bhd for the final quarter of last year is estimated to be RM274.65 million — the fourth highest sum among the ultra-rich.

PPB Group announced a dividend of 38 sen, comprising a final dividend of 22 sen and a special payout of 16 sen, in its 4QFY20 ended Dec 31, 2020. Kuok holds a 50.81% stake in the diversified conglomerate through his private investment vehicle, Kuok Brothers Sdn Bhd. He also holds a stake in Shangri-La Hotels (Malaysia) Bhd, though the latter did not declare any dividends for its FY20.

The fifth largest dividend gainer among the top 10 Malaysian billionaires is the founder and chairman of Hartalega Holdings Bhd, Kuan Kam Hon, who received RM162.47 million from the rubber glove maker, which recently announced a record high net profit of RM1 billion, and a second interim dividend of 9.65 sen for its 3QFY21 ended Dec 31, 2020, which was paid in February.

Based on the latest bourse filings, Kuan holds a direct interest of 0.795% in the group and a 48.32% indirect interest via Hartalega Industries Sdn Bhd. The glove manufacturer recently announced a record high net profit of RM1 billion for its 3QFY21 ended Dec 31, 2020 and declared a second interim dividend of 9.65 sen.

Next comes gaming tycoon Tan Sri Lim Kok Thay, who likely earned RM148.73 million in dividends from his shareholdings in the Genting group of companies listed on Bursa, despite the group facing challenges in operating its casino and resorts amid the pandemic.

This is based on the RM146.54 million Genting Bhd paid to Kok Thay's private investment company, Kien Huat Realty Sdn Bhd, and the dividends declared by Genting Plantations Bhd and Genting Malaysia Bhd.

Genting Malaysia declared a dividend payout of 8.5 sen per share for its 4QFY20 ended Dec 31, 2020, while Genting Plantations announced a 15 sen dividend — comprising a final dividend of four sen per share and a special dividend of 11 sen per share.

Kok Thay holds a direct interest of 0.44% in Genting Malaysia and a direct interest of 0.05% in Genting Plantations.

After Kok Thay is Datuk Lee Yeow Chor, who earned RM141.28 million in dividends from his holding in IOI Corp Bhd. Lee holds a direct interest of 0.16% and an indirect interest of 49.94% in the group.

Meanwhile, Press Metal Aluminium Holdings Bhd's Tan Sri Koon Poh Keong garnered RM20.22 million through his holdings in Press Metal and PMB Technology Bhd. Press Metal declared a fourth interim single-tier dividend of 1.25 sen per share in its 4QFY20 ended Dec 31, 2020 while PMB Technology declared a one sen dividend to its shareholders.

Two of the top 10 tycoons, however, did not appear to have gained any dividend payments from their shareholdings in Bursa-listed companies. They are gaming tycoon Tan Sri Chen Lip Keong and Tan Sri Lau Cho Kun, the largest shareholder in Hap Seng Consolidated Bhd.

What the glove maker billionaires take home

Though not on the list of Malaysia's top 10 richest tycoons based on Forbes 2020 list — which was published in March 2020 — Top Glove Corp Bhd's founder and executive chairman Tan Sri Dr Lim Wee Chai earned about RM460.45 million in dividend in end-2020, thanks to the interim dividend of 16.5 sen that the world's largest rubber glove maker declared in its 1QFY21 ended Nov 30, 2020.

The group also announced an interim dividend payment of 25.2 sen per share for its 2QFY21 ended Feb 28, 2021, payable on April 6 this year. Based on the announcement, Wee Chai stands to gain another dividend payout of RM710.12 million before mid-2021.

That means just for the first two quarters of Top Glove's FY21, Wee Chai has accumulated a total of RM1.17 billion in dividends, based on his total shareholdings of 35.22% in Top Glove, comprising a direct stake of 26.56% and an indirectly held stake of 8.65%.

Datuk Seri Stanley Thai of Supermax Corp Bhd, on the other hand, accumulated dividends of RM38.17 million, while Tan Sri Lim Kuang Sia of Kossan Rubber Industries Bhd earned RM132.99 million.

Including Kwan, the billionaires from the big four glove makers on Bursa earned RM794.07 million worth of dividends in end-2020, as their companies' earnings continued to scale new highs following the surge in glove demand amid the Covid-19 outbreak.

 

https://www.theedgemarkets.com/article/malaysias-richest-tycoons-and-billions-dividends-they-earned-final-quarter-2020

Valuation of Common Stock with Temporary Supernormal Growth

The correct valuation model to value such "supernormal growth" companies is the multi-stage dividend discount model that combines

• the multi-period and 
• infinite-period dividend discount models (Gordon Growth Model).

Value
= Multi-period DDM + Infinite Period (constant growth) DDM
= D1/(1+k)^1 + D2/(1+k)^2 + ..... + Dn/(1+k)^n + Pn/(1+k)^n


Dn = Last dividend of the supernormal growth period
Dn+1 = First dividend of the constant growth period.
Pn = Dn+1 / (k-g) = PV at time n+1 of Dn at a Constant rate of Growth.

Dividend Discount Model

Dividend Discount Model

Where:

V = the value

D₁ = the dividend next period

r = the required rate of return

1.  One year holding period

If our holding period is just one year, the value that we will place on the stock today is the present value of the dividends that we will receive over the year plus the present value of the price that we expect to sell the stock for at the end of the holding period.

Present Value of the dividends that we will receive over one year 
= Dividend to be received/(1+r)^1

Present value of the price we expect to sell the stock for at the end of the holding period
= Year-end price / (1+k)^1


Value 
= PV of dividends receive over 1 year + PV of price we expect to sell at end of 1 year
= [Dividend to be received/(1+k)^1]  +  [Year-end price /(1+k)^1]

k = cost of equity or required rate of return



2.  Multiple-Year Holding Period DDM

We apply the same discounting principles for valuing common stock over multiple holding periods.

In order to estimate the intrinsic value of the stock, we first estimate the dividends that will be received every year that the stock is held and the price that the stock will sell for at the end of the holding period.

Then we simply discount these expected cash flows at the cost of equity (required return).

PV of Dividends received in Year 1 = D1/(1+k)^1
PV of Dividends received in Year 2 = D2/(1+k)^2
PV of Dividends received in Year .. =
PV of Dividends received in Year n= Dn/(1+k)^n
Price of stock sold at end of holding period n = Pn / (1+k)^n

Value
= PV of D1 + PV of D2 + PV of D3 +.................. PV of Dn + PV of Holding-Period Price
= [D1/(1+k)^1]  + [D2/(1+k)^2]  + .[D3/(1+k)^3]..........[.Dn/(1+k)^n]  + [Pn / (1+k)^n]




3.  Infinite Period DDM (Gordon Growth Model)

Assumptions of the Infinite Period DDM (Gordon Growth Model):

• The infinite period dividend discount model assumes that a company will continue to pay dividends for an infinite number of periods.
• It also assumes that the dividend stream will grow at a constant rate (g) over the infinite period.

In this case, the intrinsic value of the stock is calculated as:

Value = PV of D1 + PV of D2 + PV of D3 + ...........PV of Dn....... + PV of Dinfinity


PV of Dividends received in Year 1 = D1/(1+k)^1 = D0(1+g)^1/(1+k)^1
PV of Dividends received in Year 2 = D2/(1+k)^2 = D0(1+g)^2/(1+k)^2
PV of Dividends received in Year .. =
PV of Dividends received in Year n= Dn/(1+k)^n = DO(1+g)^infinity / (1+k)^infinity

D0 = Dividends received at year 0

This equation simplifies to:

PV at year 0
= D0(1+g)^1/(k-g)^1
= D1/(k-g)






The critical relationship between k and g in the infinite-period DDM (Gordon Growth Model)

The relation between k and g is critical:

• As (k-g) increases, the intrinsic value of the stock falls.
• As (k-g) narrows, the intrinsic value of the stock rises.
• Small changes in either k or g, can cause large changes in the value of the stock.

For the infinite-period DDM model to work, the following assumptions must hold:

• Dividend grows at a rate, g, which is not expected to change (constant growth).
• k must be greater than g; otherwise the model breaks down because of the denominator being negative.

(k-g) = difference between k and g or difference between cost of equity or required rate of return and growth rate.







Additional notes:

Return on investment = Dividend Yield + Growth over Time:

Rearranging the DDM formula:

PV = D1 / (k-g)

k = (D1/PV) + g
   = Dividend yield + growth over time.

This expression for the cost of equity (required rate of return) tells us that the return on an equity investment has two components:

• The dividend yield (D1/PV at year 0)
• Growth over time (g)

Dividend Discount Model

Present Value Models

Dividend Discount Model


1.  If a company pays regular dividends

The dividend discount model (DDM) values a share of common stock as the present value of its expected future cash flows (dividends).

When an investor sells a share of common stock, the value that the purchaser will pay equals the present value of the future stream of cash flows (i.e. the remaining dividend stream).

Therefore, the value of the stock at any point in time is still determined by its expected future dividends.

When this value is discounted to the present, we are back at the original dividend discount model.



2.  If a company pays no dividends currently

If a company pays no dividends currently, it does not mean that its stock will be worthless.

There is an expectation that after a certain period of time the firm will start making dividend payments.

Currently, the company is reinvesting all its earnings in its business with the expectation that its earnings and dividends will be larger and will grow faster in the future.



3.  If the company is making losses

If the company does not make positive earnings going forward, there will still be an expectation of a liquidating dividend.  

The amount of this dividend will be discounted at the required rate of return to compute the stock's current price.




Additional notes:

The required rate of return on equity is usually estimated using the CAPM.

Another approach for calculating the required return on equity simply adds a risk premium to the before-tax cost of debt of the company.

Valuation methods

Even the best investing strategies won't help you if you don't understand the value of the investments you are making.

Without assessing the future potential of your investments, you are simply gambling by letting probability take over.

It is in the nature of investment valuation that the calculations of their value are mathematical.


Return on Investment (ROI)

This is the end result of how much money you make or lose on an investment.

ROI = (P - C) / C

P= current market price at which you sold the investment
C = cost of the investment - the price you paid for it.


Present Value

Present value is the value that an investment with known future value has at the present time.

PV = FV / [(1+r)^t]

FV= amount of money you will receive at the end of the investment's life
r= the rate of return you are earning on the investment during that time
t= the amount of time that passes (in years) between now and the end of the investment's life.

This is an extremely common calculation with bonds, since bonds are sold at the discounted rate (the present value), and you must estimate whether the market price of the bond is above or below the present value to determine whether the price is worth it.


Net Present Value (NPV)

Net present value is the sum of present values on an investment that generates multiple cash flows.

When calculating NPV, calculate the present values of each payment you will receive, and then add them together.



ABSOLUTE AND RELATIVE MODELS

The value of fixed-rate investments is easy because you have certainty regarding what you will earn.

The problems come when you start estimating the value of variable-rate investments, like stocks or derivatives.

There are many complicated methods of calculating variable-rate investments, but they fall into three categories:

Absolute
Relative, and
Hybrid


Absolute models

Liquidation value or intrinsic value

Absolute models are the most popular among investors who look for the intrinsic value of an investment, rather than attempting to benefit by trading on movements in the market.

Such models include calculations of the liquidation value of the company, often adjusted for growth over the next few years.

In other words, you start with what the company would be worth if you simply sold everything it has for the cash, then subtract the debt.

Of course, the value of companies changes over time, and the market price of stocks is often based on the future earning potential of the company, rather than its current earnings.

So, estimates of liquidation value start with the current liquidation value and then increase that value by a percentage consistent with their average past growth, or by some other estimate of their future growth.


Dividend Discount Model  (DDM)

For investors who prefer investments that yield dividends, the DDM is popular.

DDM is calculated by working out the NPV of future dividends.

If you estimate that dividends will grow over that period, simply subtract the growth rate from the rate of return in the NPV calculation.

NPV = Dividend / (R - g)

R= discount rate
g= growth rate

For dividend investors, if the NPV of the dividends is lower than the current market price per share of the stock, the stock is undervalued, making it a great deal.


Relative Models

Relative models are popular among traders, who invest based on short-term movements in the market because they allow them to compare the performance of various options.

Common tools in performing these comparative assessments use the financial statements of a company and include:

Price to earnings ratio (P/E)

This functions as an indicator of the price you are paying for the profits a company will earn for you, either as dividends or through the investment of retained earnings.

Return on equity (ROE) = Net Income / Shareholder Equity

This indicates the amount of money a company makes using the money shareholders have invested in the company.

Operating margin = Operating Income / Net Sales

This indicates how efficiently a company is operating.


These indicators are not calculations of company value, but indicators of the comparative performance of companies in which one might invest.



Hybrids

Absolute and relative models are combined to create hybrids that attempt to estimate the value of a stock by combining the intrinsic value of the company with how well it performs compared to other potential investments.

Dividend Discount Model

Dividend Discount Model

The dividend discount model is a more conservative variation of discounted cash flows, that says a share of stock is worth the present value of its future dividends, rather than its earnings. This model was popularized by John Burr Williams in The Theory of Investment Value. Williams wrote his book in the 1930s, when people were trying to establish a science of investing after getting burned by the irrational exuberance and accounting tricks of the previous decade. (Plus ca change, Jack.) Williams decided that reported earnings were way too nebulous to be trusted, like buying "bees for their buzz" instead of their honey, and that the only return you could really believe in was an actual check in the mail:

... a stock is worth the present value of all the dividends ever to be paid upon it, no more, no less... Present earnings, outlook, financial condition, and capitalization should bear upon the price of a stock only as they assist buyers and sellers in estimating future dividends.

Short version: you buy "a stock, by heck, for her dividends."

If you'd like to try this method out, you can use the regular calculator, substituting dividends for earnings.  (You presumably use a lower discount rate to reflect lower risk, since a dividend is more of a sure thing than reported earnings; the only guidance Williams gives here is that you use your desired rate of return as the discount rate.) You can also see the dividend discount formula - again, think "dividends" when the page says "earnings".



The dividend discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in theory it applies to all cases, since even retained earnings should eventually turn into dividends. That's because once a company reaches its "mature" stage it won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. (Plan "B" would be for the CEO to pursue some insane acquisition, just to gratify his bloated ego.) As Williams puts it,

If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later; if not, then they are money lost.... In short, a stock is worth only what you can get out of it.

Dividend Taxes

Williams mentions that the "rich men" of his day were starting to prefer dividends over capital gains, due to some recent changes in the tax code.  Fast-forward a few generations... and in May 2003 the tax rate on dividends was lowered to match that on long term capital gains. Whether or not any rich men were involved, the change is logical in the sense that companies that ought to be paying dividends will no longer have a disincentive for doing so out of concerns for the tax consequences to their shareholders. But one thing that probably won't ever happen is setting the dividend tax even lower than the long term capital gains tax, because doing so would disadvantage the stock of growing companies that really can't pay dividends yet - what would it mean for our economic growth if we made it harder for "growth" companies to raise capital? 

http://www.moneychimp.com/articles/valuation/dividend_discount.htm

Substitute Dividends for Earnings in these calculators

Discounted Cash Flows Calculator

Stock Valuation based on Earnings

Types of Growth and DCF models

Models of Investment Valuation





Declining DDM  



Constant DDM   


                
Slow Growth DDM  


             
Fast Growth DDM




Forecasts of Dividends or Free Cash Flow



Logit Growth DDM 
                     

2-Stage Growth DDM           



FCF Constant D/E                 



FCF Rising D/E




http://www.numeraire.com/value.htm

Valuation of Bonds and Shares

Valuation of Bonds and Shares

View more presentations from Biswajit Ghosh

How to value stocks and shares

This article shows how you can value any security - if you know how much it will pay, when it will pay it and the return you want to make.

Time value of money

The principle is known as the 'time value of money' and we can flesh it out with an example. We'll assume that all money earns interest at 8% a year and costs the same to borrow. On that basis, if I have $100 now, what will it be worth in 10 years' time?

The answer is: 100 x 1.0810 = $215.89. Now, if someone offered you $215.89 in 10 years' time, how much would you pay them now for it? The answer goes like this. The money you pay now is either money that won't be earning interest for you at 8% a year for the next 10 years, or it's money that you've borrowed and on which you must pay interest at 8% for the next 10 years. Either way, paying out money now costs you 8% a year until you get it back. So, to buy a cash flow of $215.89 in 10 years' time, you'd pay up to $100 because, if you'd kept the $100 (or not borrowed it), you'd have turned it into $215.89 over 10 years (or saved yourself that amount).

So the $215.89 in 10 years' time has a value of $100. If you paid more than that then you'd make a loss; if you paid less, then you'd make a profit; and if you paid a lot less, then you'd make a really good profit. That's value investing.

Why 8%, though? Good question. It was nothing more than a stab in the dark really. People will argue until the cows come home about the right figure to use. Essentially, it should represent the 'opportunity cost of capital'. So you'd come up with a different figure depending on what you might otherwise plan on doing with the money. If you would otherwise have put it into a term deposit paying 5%, you'd use 5%. If you might otherwise have put it to work in an exciting business venture on which you expected to make 15% a year, then you might use that figure (although anticipating a return of more than 10% is pretty optimistic by most standards).

Of course most securities have more than one cash flow to consider, which means that to get the total value you have to work out the value of each individual cash flow and then tot them all up. How much would you pay for a bond that promised to pay $7.50 at the end of each of the next nine years, and then $107.50 at the end of the tenth, assuming you wanted to make 6% a year? Looking at things from the other direction, what would be your annual return if you paid $106.73 for the bond?

Principle always the same

Doing all the sums is beyond the scope of this article (but the answers are $111.04 and 6.56% in case you want to check your working and, if you're hungry for more, take a look at the Investor's College articles of issue 110/Aug 02 and issue 163/Oct 04). But the principle is always the same: all cash flows have a value according to when they are going to be received and the 'opportunity cost' (otherwise known as the 'discount rate') you ascribe to them. To get the value of a set of cash flows, you just tot up the values of the individual components.

When you get a cash flow that repeats every year, forever, something really handy happens: the sum of all the individual cash flows simplifies down to just one cash flow divided by the discount rate. So if you have a security paying 10 cents a year, forever, and you decide you want a return of 8% a year, then the security's value is 10 cents divided by 8%, which is 125 cents.

And the sums even have the decency to remain pretty simple if you assume growing cash flows - at least if you assume that they grow at the same rate each year. In this case, you just divide the first cash flow by the difference between the discount rate and the growth rate (the growth effectively offsets part of the discount rate). So if you have a security paying 10 cents this year, growing forever at 4% per year, and you decide that you want a return of 8% per year, then the security is worth 10 cents divided by 4% (that is, the difference between 8% and 4%), which is 250 cents.

Paradox

So if you're aiming to make 8% a year, then an annual payment of 10 cents growing at 4% a year is worth exactly double the value of a flat 10 cents a year. A payment growing forever at 6% would be worth four times (250 cents) as much and, somewhat paradoxically, a payment growing at 8% or more would be worth an infinite amount.

This curious result is arrived at because you've assumed an opportunity cost below the growth you expect from your investment, even though that investment is itself an opportunity.

Paradoxes aside, this is hopefully beginning to sound rather like companies paying dividends - precisely because it is rather like companies paying dividends. But companies introduce problems because the cash they pay out is neither predictable nor grows steadily. And some companies don't pay out dividends at all.

http://www.intelligentinvestor.com.au/articles/198/How-to-value-stocks-and-shares.cfm

Digging Into The Dividend Discount Model

by Ben McClure 

It's time to dust off one of the oldest, most conservative methods of valuing stocks - thedividend discount model (DDM). It's one of the basic applications of a financial theory that students in any introductory finance class must learn. Unfortunately, the theory is the easy part. The model requires loads of assumptions about companies' dividend payments and growth patterns, as well as future interest rates. Difficulties spring up in the search for sensible numbers to fold into the equation. Here we'll examine this model and show you how to calculate it. (Will the dividend discount model work for you? Find out more in How To Choose The Best Stock Valuation Method.)

Tutorial: Top Stock-Picking Strategies

The Dividend Discount Model
Here is the basic idea: any stock is ultimately worth no more than what it will provide investors in current and future dividends. Financial theory says that the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. According to the DDM, dividends are the cash flows that are returned to the shareholder. (We're going to assume you understand the concepts of time value of money and discounting. You can learn more about these subjects in Understanding The Time Value Of Money.)

To value a company using the DDM, you calculate the value of dividend payments that you think a stock will throw-off in the years ahead. Here is what the model says:

Where:
P= the price at time 0
r= discount rate

For simplicity's sake, consider a company with a $1 annual dividend. If you figure the company will pay that dividend indefinitely, you must ask yourself what you are willing to pay for that company. Assume expected return, or, more appropriately in academic parlance, therequired rate of return, is 5%. According to the dividend discount model, the company should be worth $20 ($1.00 / .05).

How do we get to the formula above? It's actually just an application of the formula for aperpetuity:



The obvious shortcoming of the model above is that you'd expect most companies to grow over time. If you think this is the case, then the denominator equals the expected return less the dividend growth rate. This is known as the constant growth DDM or the Gordon modelafter its creator, Myron Gordon. Let's say you think the company's dividend will grow by 3% annually. The company's value should then be $1 / (.05 - .03) = $50. Here is the formula for valuing a company with a constantly growing dividend, as well as the proof of the formula:


The classic dividend discount model works best when valuing a mature company that pays a hefty portion of its earnings as dividends, such as a utility company.

The Problem of Forecasting
Proponents of the dividend discount model say that only future cash dividends can give you a reliable estimate of a company's intrinsic value. Buying a stock for any other reason - say, paying 20 times the company's earnings today because somebody will pay 30 times tomorrow - is mere speculation.

In truth, the dividend discount model requires an enormous amount of speculation in trying to forecast future dividends. Even when you apply it to steady, reliable, dividend-paying companies, you still need to make plenty of assumptions about their future. The model is subject to the axiom "garbage in, garbage out", meaning that a model is only as good as the assumptions it is based upon. Furthermore, the inputs that produce valuations are always changing and susceptible to error.

The first big assumption that the DDM makes is that dividends are steady, or grow at a constant rate indefinitely. But even for steady, reliable, utility-type stocks, it can be tricky to forecast exactly what the dividend payment will be next year, never mind a dozen years from now. (Find out some of the reasons why companies cut dividends in Your Dividend Payout: Can You Count On It?)


Multi-Stage Dividend Discount Models 
To get around the problem posed by unsteady dividends, multi-stage models take the DDM a step closer to reality by assuming that the company will experience differing growth phases. Stock analysts build complex forecast models with many phases of differing growth to better reflect real prospects. For example, a multi-stage DDM may predict that a company will have a dividend that grows at 5% for seven years, 3% for the following three years and then at 2% in perpetuity.

However, such an approach brings even more assumptions into the model - although it doesn't assume that a dividend will grow at a constant rate, it must guess when and by how much a dividend will change over time.

What Should Be Expected?
Another sticking point with the DDM is that no one really knows for certain the appropriate expected rate of return to use. It's not always wise simply to use the long-term interest rate because the appropriateness of this can change.

Watch: Dividend Yields

The High-Growth Problem
No fancy DDM model is able to solve the problem of high-growth stocks. If the company's dividend growth rate exceeds the expected return rate, you cannot calculate a value because you get a negative denominator in the formula. Stocks don't have a negative value. Consider a company with a dividend growing at 20% while the expected return rate is only 5%: in the denominator (r-g) you would have -15% (5%-20%)!

In fact, even if the growth rate does not exceed the expected return rate, growth stocks, which don't pay dividends, are even tougher to value using this model. If you hope to value a growth stock with the dividend discount model, your valuation will be based on nothing more than guesses about the company's future profits and dividend policy decisions. Most growth stocks don't pay out dividends. Rather, they re-invest earnings into the company with the hope of providing shareholders with returns by means of a higher share price.

Consider Microsoft, which didn't pay a dividend for decades. Given this fact, the model might suggest the company was worthless at that time - which is completely absurd. Remember, only about one-third of all public companies pay dividends. Furthermore, even companies that do offer payouts are allocating less and less of their earnings to shareholders.

Conclusion
The dividend discount model is by no means the be-all and end-all for valuation. That being said, learning about the dividend discount model does encourage thinking. It forces investors to evaluate different assumptions about growth and future prospects. If nothing else, the DDM demonstrates the underlying principle that a company is worth the sum of its discounted future cash flows. (Whether or not dividends are the correct measure of cash flow is another question.) The challenge is to make the model as applicable to reality as possible, which means using the most reliable assumptions available.

by Ben McClure (Contact Author | Biography)

Ben McClure is a long-time contributor to Investopedia.com.

Ben is the director of Bay of Thermi Limited, an independent research and consulting firm that specializes in preparing early stage ventures for new investment and the marketplace. He works with a wide range of clients in the North America, Europe and Latin America. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities, and led new venture development at a major technology commercialization consulting group in Canada. He started his career as writer/analyst at the Economist Group. Mr. McClure graduated from the University of Alberta's School of Business with an MBA.

Ben's hard and fast investing philosophy is that the herd is always wrong, but heck, if it pays, there's nothing wrong with being a sheep.

He lives in Thessaloniki, Greece. You can learn more about Bay of Thermi Limited atwww.bayofthermi.com.

Filed Under: Dividend, Financial Theory, Fundamental Analysis, Stock Analysis, Stocks

http://www.investopedia.com/articles/fundamental/04/041404.asp

Valuing A Stock With Supernormal Dividend Growth Rates

by Peter Cherewyk 

The supernormal growth model is most commonly seen in finance classes or more advanced investing certificate exams. It is based on discounting cash flows, and the purpose of the supernormal growth model is to value a stock which is expected to have higher than normal growth in dividend payments for some period in the future. After this supernormal growth the dividend is expected to go back to a normal with a constant growth. (For a background reading, check out Digging Into The Dividend Discount Model.)

Tutorial: Discounted Cash Flow Analysis

To understand the supernormal growth model we will go through three steps.

1. Dividend discount model (no growth in dividend payments)

2. Dividend growth model with constant growth (Gordon Growth Model)

3. Dividend discount model with supernormal growth

Dividend Discount Model (No Growth in Dividend Payments)
Preferred equity will usually pay the stockholder a fixed dividend, unlike common shares. If you take this payment and find the present value of the perpetuity you will find the implied value of the stock.

For example, if ABC Company is set to pay a $1.45 dividend next period and the required rate of return is 9%, then the expected value of the stock using this method would be 1.45/0.09 = $16.11. Every dividend payment in the future was discounted back to the present and added together.

V = D1/(1+k) + D2/(1+k)2 + D3/(1+k)3 + ... + Dn/(1+k)n

Where:
V = the value
D₁ = the dividend next period
k = the required rate of return

For example:

V = $1.45/(1.09) + $1.45/(1.09)2 + $1.45/(1.09)3 + … + $1.45/(1.09)n V= $1.33 + 1.22 + 1.12 + . . . V= $16.11

Because every dividend is the same we can reduce this equation down to: V= D/k

V=$1.45/0.09

V=$16.11

With common shares you will not have the predictability in the dividend distribution. To find the value of a common share, take the dividends you expect to receive during your holding period and discount it back to the present period. But there is one additional calculation: when you sell the common shares you will have a lump sum in the future which will have to be discounted back as well. We will use "P" to represent the future price of the shares when you sell them. Take this expected price (P) of the stock at the end of the holding period and discount it back at the discount rate. You can already see that there are more assumptions you need to make which increases the odds of miscalculating. (Explore arguments for and against company dividend policy, and learn how companies determine how much to pay out, read How And Why Do Companies Pay Dividends?)

For example, if you were thinking about holding a stock for three years and expected the price to be $35 after the third year,  the expected dividend is $1.45 per year.

V= D1/(1+k) + D2/(1+k)2  + D3/(1+k)3 + P/(1+k)3 V = $1.45/1.09 + $1.45/1.092 + $1.45/1.093 +$35/1.093

Dividend Growth Model with Constant Growth (Gordon Growth Model)
Next let's assume there is a constant growth in the dividend. This would be best suited for evaluating larger stable dividend paying stocks. Look to the history of consistent dividend payments and predict the growth rate given the economy the industry and the company's policy on retained earnings.

Again we base the value on the present value of future cash flows:

V = D1/(1+k) + D2/(1+k)2+…..+Dn/(1+k)n

But we add a growth rate to each of the dividends (D₁, D₂, D₃, etc.) In this example we will assume a 3% growth rate.

So D₁ would be $1.45(1.03) = $1.49

D₂ = $1.45(1.03)² = $1.54

D₃ = $1.45(1.03)³ = $1.58

This changes our original equation to : 

V = D1(1.03)/(1+k) + D2(1.03)2/(1+k)2+…..+Dn(1.03)n/(1+k)n V = $1.45(1.03)/(1.09) + $1.45(1.03)2/(1.09)2 + $1.45(1.03)3/(1.09)3 + … + $1.45(1.03)n/(1.09)n V = $1.37 +$1.29 + $1.22 + …. V = 24.89

This reduces down to: V = D₁/k-g

Dividend Discount Model with Supernormal Growth
Now that we know how to calculate the value of a stock with a constantly growing dividend we can move on to a supernormal growth dividend.

One way to think about the dividend payments is in two parts (A and B). Part A has a higher growth dividend; Part B has a constant growth dividend. (For more, see How Dividends Work For Investors.)

A) Higher Growth
This part is pretty straight forward - calculate each dividend amount at the higher growth rate and discount it back to the present period. This takes care of the supernormal growth period; all that is left is the value of the dividend payments which will grow at a continuous rate.

B) Regular Growth
Still working with the last period of higher growth, calculate the value of the remaining dividends using the V = D₁/(k-g) equation from the previous section. But D₁ in this case would be next year's dividend, expected to be growing at the constant rate. Now discount back to the present value through four periods. A common mistake is discounting back five periods instead of four. But we use the fourth period because the valuation of the perpetuity of dividends is based on the end of year dividend in period four, which takes into account dividends in year five and on.

The values of all discounted dividend payments are added up to get the net present value. For example if you have a stock which pays a $1.45 dividend which is expected to grow at 15% for three years then at a constant 6% into the future. The discount rate is 12%.

Steps

1. Find the four high growth dividends.

2. Find the value of the constant growth dividends from the fifth dividend onward.

3. Discount each value.

4. Add up the total amount.

Period	Dividend	Calculation	Amount	Present Value
1	D1	$1.45 x 1.151	$1.67	$1.50
2	D2	$1.45 x 1.152	$1.92	$1.56
3	D3	$1.45 x 1.153	$2.21	$1.61
4	D4	$1.45 x 1.154	$2.54	$1.67
5	D5 …	$2.536 x 1.06	$2.69
		$2.688 / (0.11 - 0.06)	$53.76
		$53.76 / 1.114		$35.42
			NPV	$41.76

Implementation
When doing a discount calculation you are usually attempting to estimate the value of the future payments. Then you can compare this calculated intrinsic value to the market price to see if the stock is over or undervalued compared to your calculations. In theory this technique would be used on growth companies expecting higher than normal growth, but the assumptions and expectations are hard to predict. Companies could not maintain a high growth rate over long periods of time. In a competitive market new entrants and alternatives will compete for the same returns thus bringing return on equity (ROE) down.

The Bottom LineCalculations using the supernormal growth model are difficult because of the assumptions involved such as the required rate or return, growth or length of higher returns. If this is off, it could drastically change the value of the shares. In most cases, such as tests or homework, these numbers will be given, but in the real world we are left to calculate and estimate each of the metrics and evaluate the current asking price for shares. Supernormal growth is based on a simple idea but can even give veteran investors trouble. (For more, check out Taking Stock Of Discounted Cash Flow.)

by Peter Cherewyk (Contact Author | Biography)

Peter Cherewyk has worked in the financial field for over 10 years. He completed his Bachelor of Commerce from the University of Alberta, and is currently working towards a Chartered Financial Analyst designation. He enjoys hockey and hiking and the opportunity to teach others.

Filed Under: Dividend, Fundamental Analysis, Stock Analysis, Stocks

http://www.investopedia.com/articles/fundamental-analysis/11/supernormal-growth-analysis.asp

Dividend Valuation: dividends are the boldest way that a company can announce their performance and earnings potential.

Dividend Valuation

Valuing a company based on its ability to provide regular and increasing dividends is a worthy practice.  This is because dividends represent the only real gains of investors in a company where they have stake.

• Either in cash or asset payout, dividends are the boldest way that a company can announce their performance and earnings potential.  

• Unlike market value which indicates the idle wealth of shareholders, dividend valuation injects the past, present, and future earnings performance of the firm as it cannot distribute dividends without any excess money to finance operations and expand.  

• On this ground, however, growing companies are likely not regularly distributing dividends.  This is caused by their interests to reinvest excess earnings and concentrate them to growth prospects rather than disbursed to individual investors.

The dividend policy of a firm tells so much of its life cycle. 

• When companies reached their maximum growth potential, dividend payouts tend to be a practice.  This is because the firm wants to retain investors and encourage them to maintain their investment even growth had stopped.  

• Investors can use dividend policy as reference whether a firm is facing financial difficulties and failed to produce planned profits.  This scenario is observed in cases of dividend payment cuts.  

• On the other hand, consistent and even rising dividend payment may also represent a negative feature like financing such payments with debt.  In effect, the benefits of dividends are waived by costs and risks of debt and interest financing.  

• With dividends coming directly from earnings or buyback programs, continuity and regularity of its distribution minimizes the probability that managers will manipulate accounting data particularly earnings.

Computing for corporate value, specifically common shares, using dividends is done in at least three ways as there are numerous models that have been developed.

• Zero and constant dividend growth is a formula appropriate for mature companies which can minimally expand their operations.  Discount rate and expected dividend payout are required variables.  Although with less uncertainty and greater potential to accurately value the firm, growth potential is not present.

• The second formula offers the ability to estimate future dividend growth of a firm.  As this relies on historical data of actual dividends, the quality of valuation is a function of the quantity of the periods that have been collected.  If the firm do not have an ample historical data, results may not likely be as statistically significant as with a sufficient data under study.

• Lastly, irregular dividend to be followed by constant growth is apparently a version that follows the corporate life cycle (e.g. from growth to mature years).  This formula requires the beta or the degree of share sensitivity to market changes as well as the forecasted dividend growth.  This computation requires extensive market research and analysis which is vital to investing but troublesome to some investors.

http://ivythesis.typepad.com/term_paper_topics/2010/03/valuation-method-analysis-a-case-study-of-tesco.html