Dividend Capitalised Valuation: Preamble 2 "The discount rate factor'
Quote:
Originally Posted by
Snoopy
Roger here is referencing the 'Dividend Discount Model' for valuing shares which, according to investpedia, goes like this:
Value of Share = (Dividend per Share) / (Discount Rate - Dividend Growth Rate)
The choice of a discount rate will make a large difference to the end result. The preferred 'discount rate', in the referenced 'investopedia' model, seems to eqaute to the company's 'cost of equity capital'. Note that if the dividend growth rate is assumed to be zero (as I will be assuming), then the investopedia formula collapses to the same formula that I have been using before I looked up that reference.
Dividend per Share / Yield = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )
So another way of looking at this situation is to consider the 'cost of equity capital' to be measured by the yield an investor might accept.
If we assume 'zero dividend growth' over a 'business cycle', then the yield that I would accept, depends on the quality of the underlying business. For companies in the finance sector, I would split finance businesses into three categories. I present an example from each of my categories below:
Category |
Example |
Acceptable Yield |
Tier 1 Finance Industry Company |
ANZ Bank |
6.5% |
Tier 2 Finance Industry Company |
Heartland Bank |
7.5% |
Tier 3 Finance Industry Company |
Geneva Finance |
8.5% |
Now there are most sophisticated techniques, such as ther capital sset pricing model, that can be used to get the 'cost of capital' for a company. But personally I prefer this simpler steadier approach. I am saying here that Heartland is in the middle of the finance company spectrum. Not as 'safe' as one of the big banks. But a cut above what might be considered today 'fringe lenders'. After the great finance company clean out, I am considering any company that calls itself a finance company a 'fringe lender' these days!
SNOOPY
Dividend Capitalised Valuation: The Data: FY2016 perspective
Quote:
Originally Posted by
Snoopy
Dividend per Share / Yield = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )
So another way of looking at this situation is to consider the 'cost of equity capital' to be measured by the yield an investor might accept.
We assume 'zero dividend growth' over a 'business cycle'
Note that the financial year starts on 1st July of the previous calendar year and ends on 30th June.
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
FY2013 |
1.5cps(sp) + 2.0cps |
17th December 2012: Heartland becomes a bank |
FY2014 |
2.5cps + 2.5cps |
1st April 2014: Seniors 'Reverse Mortgage' Business Acquired |
FY2015 |
3.5cps + 3.0cps |
10th September 2014: invests in Harmony P2P startup |
|
|
28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) |
FY2016 |
4.5cps + 3.5cps |
FY2017(f) |
5.0cps + 3.5cps(f) |
Average FY2015 to FY2017 inclusive |
7.66cps |
|
(f) indicates forecast result.
I have chosen to use the last three years of operation as indicative, as these years include the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.
SNOOPY
Dividend Capitalised Valuation: The Calculation: FY2016 perspective
Quote:
Originally Posted by
Snoopy
Category |
Example |
Acceptable Yield |
Tier 2 Finance Industry Company |
Heartland Bank |
7.5% |
Quote:
Originally Posted by
Snoopy
Note that the financial year starts on 1st July of the previous calendar year and ends on 30th June.
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
Average FY2015 to FY2017 inclusive |
7.66cps |
|
I have chosen to use the last three years of operation as indicative, as these years include the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.
Plugging in a representative yield, one that represents the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation
(Representative Dividend per Share) / (Acceptable Yield) = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )
7.66c / 0.72 x 0.075 = $1.42
A reminder here that NTA was 91cps at balance date. This means my fair valuation is at a good premium to asset value, a credit to management from the rag tag of assets that they started with.
This $1.42 valuation is measured at the average point in the business cycle. One might argue that we are now riding high in the business cycle and that this $1.42 valuation is consequently too low given today's circumstances. I wouldn't argue with that. But, ever the bargain hound, neither would I look at buying any shares myself until that share price drifts down to that $1.42 level. Don't say that Snoopy didn't warn you!
SNOOPY
Even when in deep sleep I am still very alert
Quote:
Originally Posted by
Snoopy
...(Representative Dividend per Share) / (Acceptable Yield) = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )
7.66c / 0.075 = $1.02...
You forgot to gross up the divvy
https://www.irononsticker.com/images...igress%202.jpg
Best Wishes
Paper Tiger