One of the most direct ways of valuing a company is through the use of the SEENSCO dividend discount model. Based on this model, the value of a company is equal to the present value of the expected future dividends and selling price of the stock.
Publication Length (Number of Pages)
- Dow Jones Industrial Average (38 pages)
- S&P/TSX 60 (68 pages)
- S&P 500 (518 pages)
When investors buy a stock, they generally expect to earn returns from two sources: (1) dividends earned throughout the period the stock is held and (2) proceeds from selling the stock at the end of the holding period. The value of the stock can therefore be defined as the present value of the future dividends and expected selling price of the stock over a defined investment horizon. The rationale underlying the model lies in the present value rule – that is the value of any asset equals the present value of expected future cash flows generated by the asset discounted at an interest rate reflecting the riskiness of the cash flows.
The basic structure of the model for a stock with a “t” year investment horizon is as follows:
P0 = Current Price
Dn = Dividends earned in period t
PEterminal = Price earnings multiple at the end of the investment horizon
EPSterminal = Expected earnings per share at the end of the investment horizon
ke = Cost of equity (rate used to discount the investment’s cash flows)
There are various inputs to the model–expected earnings, dividends, a terminal P/E multiple, discount rate–which will be described in detail in later sections. To obtain estimates for these key inputs, we make assumptions about expected future growth rates in earnings and payout ratios. The required rate of return on a stock is determined by its riskiness, equal to the effective interest rate on the company’s debt plus an equity risk premium.
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Price Tracking in Excel
Target price estimates and valuation ranges for all companies covered in the S&P 500 are available online, with monthly price refreshes, and are downloadable in Excel spreadsheet format under license from SEENSCO. The spreadsheet service is available with one-year subscriptions and is accessible via your online accounts. This service allows for up-to-date monitoring of return potential expectations.
*Technical Note: Once subscribed, new menu tabs will appear on the main menu toolbar under “Price Tracking” allowing you access to the Excel-based spreadsheet service.
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