I am reading up a bit on Dividend Discount Model to calculate at what price is the right price for me to buy a stock. Below are some of my analysis. I need help in verifying whether my calculation is accurate or not.

Dividend Discount Model

Value of Stock = Dividend Payout Ratio / (Expected Return - Growth)

Dividend Payout Ratio (%) = Dividend Per Share / Earning Per Share * 100

Retention Rate (%) = 1 - (Dividen Per Share / Earning Per Share) * 100

Growth (%) = ROE * Retention Rate / 100


I am using only end of Year 2007 data.

PUBLIC BANK
=========
ROE (%) = 22.73
Dividend Per Share (sen) = 47.5
Earning Per Share (sen) = 63.5
Dividend Payout Ratio (%) = 74.92
Retention Rate (%) =25.07
Growth (%) = 5.7

Expected Return (%) = 14
Value of Stock = 9.02
Current Market Price = 8.6

Buy with expected 14% return?


QL RESOURCES
==========
ROE (%) = 21.24
Dividend Per Share (sen) = 4.9
Earning Per Share (sen) = 19.2
Dividend Payout Ratio (%) = 25.52
Retention Rate (%) =74.47
Growth (%) = 15.81

Expected Return (%) = 27
Value of Stock = 2.28
Current Market Price =

Buy with 27% return?


ASIA FILE
======
ROE (%) = 17.56
Dividend Per Share (sen) = 14.6
Earning Per Share (sen) = 28.7
Dividend Payout Ratio (%) = 50.87
Retention Rate (%) = 49.12
Growth (%) = 8.62

Expected Return (%) = 20
Value of Stock = 4.47
Current Market Price =

Buy with 20% return?


KNM
===
ROE (%) = 33.87
Dividend Per Share (sen) = 0.4
Earning Per Share (sen) = 5.5
Dividend Payout Ratio (%) = 7.27
Retention Rate (%) = 92.72
Growth (%) = 31.4

Expected Return (%) = 40
Value of Stock = 0.84
Current Market Price = 0.41

Buy with 40% return??????????


YTL POWER
=======
ROE (%) = 20.71
Dividend Per Share (sen) = 9.8
Earning Per Share (sen) = 19.9
Dividend Payout Ratio (%) = 49.24
Retention Rate (%) = 50.75
Growth (%) = 10.51

Expected Return (%) = 40
Value of Stock = 1.66
Current Market Price = 0.84

I dont really understand how it can be 40% unless there is something wrong with my calculation??


Please advice. Thanks.

This model is good for reference, but lousy to guide one to buy a stock.

The calculation is perfectly ok, but not the growth rate, cannot measure like that, and also expectation return part, which is a clueless/baseless figure, no offence.

You don't buy a stock based on history as some are not able to sustain the EPS or those EPS might be just one off. You need to scrutinise the EPS part, as some EPS doesn't come from operation profit but can from through valuation adjustment.

Too simplified until can mislead. Don't get me wrong, those are perfectly ok figure to be reference, but you don't use those figure as a determine factor to make decision. Figure or data is a dead figure, you need interpretation and in depth analysis before can come out some conclusion.

Dividend Valuation Model not so suitable for listed company, it is useful to judge unlisted company only.

u must understand why they say Value of stock is $$$ but current market price is $$$ but remember past value doesnt mean future! where are the numbers??


where do they get(guess) this?? -> "Expected Return "

This post has been edited by cherasbabe: Jan 3 2009, 03:13 AM

Hi, I'm a CFA, and I must tell u this now - DDM is a bunce of nonsense - so are all the analytical tools out there.......I always laugh my head out when an analyst writes a report to recommend a "fair value" of the stock.......What arcane BS!

Let me be frank here - a stock price is not determined by DDM, or by cash flows discounted at any friggin damn rate. Well, in theory it is....

But in reality....It's determined by you and me.....Yeap - u read correctly......by you and me - and by all the auntie and uncle speculators, fundamentalists etc........It's an arms length transaction between buyer and seller....You think they give a damn about the discounted cash flows of a company for the next 5 or 10 years?

Long story short, suggest u just do three things....to try to keep it simple.

1. Buy a business, not a stock.
2. Buy a business with a sustainable future. E.g. If u have not used its products or services b4, don't bother buying it.
3. Buy it when people are selling or are being emotional....A useful tip is when the business is trading at all time low or historically low PE.

This post has been edited by Phoeni_142: Dec 23 2008, 01:06 PM

Would KNM or QL Resources fit into this picture?

it depends. Do u understand their business intimately?

I don't pretend to know everything. I don't know anything about KNM or QL. Why? I just don't understand their business model, and I can't relate to it.

Let me give u a simple example. I've been an avid investor of F&N for years. Why? It makes sense to me. I drink 100 plus almost daily. Everytime u drink teh tarik....F&N also profits from the condensed milk used.

Forgive me, I have a primitive brain.....i like to keep things simple.

So, you be the judge.

i suppose this is good classical example for the new investor; they got all mix up,
u cant calculate speculative share as the way u calculating conventional value stock.
KNM is obvious a speculative counter, it involve OIL& GAS. look at price of crude oil, this is a direct impact company and next is palm oil.
ure study work well with big capital company with more than 30 billion business, with no direct commodity involved. this is benjamin graham 1st law, his fundemental only work well at downjone 30 largest company in us, but not at s&p500, i suppose technical analysis work better there.

whichever the technique, is equally good, we all want to achieve a goal buy low sell high after all,
buy now klse is 800 over point, no doubt it might drop futher, but how much futher 400 point? that is very unlikely if it does buy more probably can consider sell ure house and car to buy stock. then try to sell at 1200 point, no doubt it might go higher but afterall we already gain 1000 point profit.
repeat above cycle u be dying rich.

regard te.

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Added on December 23, 2008, 10:10 pmadd one more point try to make it a chart and u will have better image, which to buy

This post has been edited by normanTE: Dec 23 2008, 10:10 PM

Norman,

I am in agreement with you that everyone has his or her own opinion.

However, I respectfully disagree with your assessment of the situation. Please do not make such sweeping statements, and quote me Benjamin Graham as though it is a fundamental guiding law.

I also can read the "Intelligent Investor" and parrot his philosophy.

1. Your analysis is misguided. His investment rules were never limited to the DJ 30. You mean understanding a company's business has lost all meaning, and that u should just rely on technical analysis for companies outside the DJ 30? Wow.....if u have done well using this philosophy....I congratulate you.....and I certainly hope your success has sustainability.

2. Read Buffett, Peter Lynch and Jerry Porras to have a more balanced view please.

3. Form your own opinion from your readings, and don't parrot the authors - perhaps we can have a more matured conversation then.

Goodbye!

This post has been edited by Phoeni_142: Dec 23 2008, 11:01 PM

Fundamental investment doesn't concentrate on buy low sell high (although it does, it is secondary), fundamental investors concentrate on profit and return that can generate to the shareholder which is primary reason why they want to invest into the company. Buy low sell high comes along with the ability of compnay to make profit for the shareholders. As if company able to generate more and more profit to the shareholders, then stock price will eventually go up with it.

Drop to 400 points, doesn't mean sell you house and car to buy stock is a good idea. Bare in mind when it drops to 400 points, then some company may go burst, not all stocks are the same. Stock pick is always the key or gaining in the stock market. Even it recovers to 1,200, some stocks may not recover at all while some already gone burst. We have plenty of historical example already to tell and teach us on this.

Technical analysis doesn't tell you this company is good company or not. While technical anlaysis is not a foolproof technique, it is good for reference for stock price movement, but it doesn't tell you whether the company is good to generate good return rate to the shareholder, nor it will tell you the company won't go burst.

Every tool is good but blindly follow and believe can be dangerous and costly, every tool needs be applied where it fit and applied appropriately which by then become a good guide and reference.

Just my 2 cents.

why read buffet, just buy his fund, BRK.B i have 10 share now. brk.b bought at 2500-3000usd pershare.
good to share. please read what is necessary, from reliable source as we dont have all day. READ 1929 EBNJAMIN GRAHAM SECURITIES, BIBLE OF ALL SECURITIES.

i believe there is plenty more to read
It's When You Sell That Counts 3rd Ed by Donald Cassidy
Essays of Warren Buffett: Lessons for Corporate America
The Entrepreneurial Investor: The Art, Science, and Business of Value Investing
Economics 3rd Ed: A Common Sense Guide to the Economy by Thomas Sowell
Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies by Jeremy Siegel
this is all fantastic book that i had read.
The Snowball: Warren Buffett isnt best book to read, although got award winned for best selling in NY times

Normante,

why are u just parroting and trying to be arrogant? Did you google all those titles up there just to potray yourself as "intelligent"?

Sigh - people like you are despicable.

You may also want to brush up on your grammar. Your command of English leaves much to be desired.

You don't even understand Public Bank's core business.....and you want to venture into overseas equities?

I know your type - only flashing phenomenal returns from your so called "mythical and phenomenal" portfolio.

Deep down - I know there's not much substance, and I suspect not much returns to go with it. Good luck in your endeavours. You're really not worth my time.

safety of margin.

mass public expectation

all these formula are based on expectation .... a forecast ...
do you know what is going to happen next year? what you can do is analyse from macro .. with expectation..

that is why .. always suprise you ...

ho ho ho .. met a CFA ... i am going to redo my level 3 nxt year.

Merry Christmas

http://todayfinancialworld.blogspot.com

http://itblood.blogspot.com

CFA wannabe here too Level 2

Anyway Phoeni_142 are you by chance in the finance industry in Malaysia too ??

What you said was totally true CFA models has no value in Malaysia but i believe it applies to more financially advance countries.

DDM is heavily reliant on the accuracy of your variables and like what Phoeni_142 said it is so subjective. Secondly, your dividend discount model assumes one growth rate period...when firms have multiple growth rate, how sure are you that dividend payout remains constant?

The problem in using this models in Malaysia is that we have a very ineffective corporate communication system and that companies are not investor friendly...if information was readily available i dare say DDM would be a very good indicator.

And lastly aunt and uncles cant do much to push the market, its only foreigners and EPF

phoeni

comeon please, we are not having argument, i am trying to share the knowledge as i am direct to the person who posted this " i am success"
i am no a god/ devil knowing when to buy, what i can do is improve my investment skill, those book are rated by amazon.com where i use to purchase them, they are rated 4-5 star must read books.
what make me think is u are selfish ass**** trying to pin point on other people,
please next time if u cant give a better suggestion on what to read just keep quite la .
buying brk.b is like buying a fund. so what wrong of buying berkshire = arrogant, after all it is an suggestion to the person who posted this letter head "i am success", no u phoeni. u just been too sensitive orhad buy & hold 1295.kl had lose 33% of ure portfolio.

let me tell u , ure public bank will drop futher next years.

good luck.

p/s it is discussion forum on improving our investment skill or art.
or else just buy fund and why not buying buffet FUND BRK.B is a good fund at discount.

sorry, I genuinely tried to understand what you just typed, but I guess my command of English and equities is just too poor to comprehend the degree of your sophistication.

hmnnn.......you're the oracle......i guess u know the direction of every stock.....won't bother debating with you.

good night.

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Added on December 29, 2008, 1:53 amHi Sofspy,

I used to be in financial services. Was blessed to leave my job and do investments full time. I just manage my modest portfolio of properties. I'm just a retired uncle....In fact, my young son had to show me how to use the internet!

I'm more active in the property section of this forum.....equities is just my part-time hobby, as my main bread-winner has always been bricks and mortar.

Do you go over to property forum as well? Are you in financial services? Good luck with your CFA studies. Education is something that nobody can ever take from you, and I wish you well in your future endeavours.

cheers.

This post has been edited by Phoeni_142: Dec 29 2008, 01:54 AM

Obviously you learned crab out of your CFA

Discounted Cash Flow (DCF) best accuracy are obtained by internal analyst as they're privy to inside info. Useful to sectors like properties, construction, oil rig builders.

You hate DCF because you never get it right? Your garbage data input numbers make the DCF screwed big time yeah?

Companies with a poor result from DCF are the best candidates for PN17 awards from BURSA?

A poor DCF result means declining Revenue/Sales or Profit Margin?

These 3 complicated rules every tom d*** & hairy also know
1. Buy a business, not a stock.
2. Buy a business with a sustainable future. E.g. If u have not used its products or services b4, don't bother buying it.
3. Buy it when people are selling or are being emotional....A useful tip is when the business is trading at all time low or historically low PE.

Nothing but a simple minded advice from educated CFA

Hi TS,

While I truely appreciate your effort in deriving the price of a stock using DDM, I shrugged off looking at the ridiculously high growth rate. That is 2-8x Malaysia GDP rate.


Agree with you on DCF analysis is best used by internal analysts as they have the best reflection on the macroeconomic assumptions of the industry and the business model itself. What ever the analysis is to derive on a share price, it is arguable. Let me potray an instance,
DCF analysis vs Multiple analysis (EBITDA / EV).

An analysis on a company using both models will derive to an astounding gap. A DCF analysis is forecasting the profit of a company in future to come. (Mind you, the macroeconomic assumptions are very diffcult to determine in the long-run). A multiple analysis has one component in it, the market capitalization. Looking at the heavy selling on the bourse, one wouldnt agree on using this method, especially the seller.

Now, the disparity will be, the Seller/Acquirer will prefer a DCF analysis as they reflect the best projections throughout. The Buyer will insist on Multiple analysis as according to them, the projection is already reflected in the share price. Who has the ultimate say, will win the deal.

Moral of the story, it is very subjective to derive a current stock price.

Kinitos,

Why are you being so emotional and defensive? Is it because u flunked out from your CFA many times over? Awww....poor thing.

You claim to know those "complicated" rules - but do u practice it?

I suspect not - because your kind of people just like to giving condesdending and snide remarks. The typical "bully" in the street that likes to have the last word.

Go ahead - I'll let u have the last word - but - try to act with some class and dignity please.

Your arguement is so flawed I don't even know where to begin. The assumptions placed into the DDM are also......erm....ASSUMPTIONS, right? By who? you? Typical chinaman street investor that's trying to appear intellectual.

Ok - I'm a CFA - but I guess I prefer to simplify things. I guess you're not from any financial services or investment background. If not, you won't be talking the way u just replied. I suggest you think very carefully before your next reply. If not, the joke's on you.

Maybe I'm not as smart and complex as you. Let u win.

This post has been edited by Phoeni_142: Dec 29 2008, 12:28 PM

What do you means by this? Is it means sitting under the CEO desk all day?

If i no drink beer means no Buy CARLSBG or GUINESS?

If i no like chicken means no Buy KFC?

If i no gamble means no Buy BJTOTO?

But i always use toilet paper every day so must invest ONLY in companies making toilet paper product?