What will be the intrinsic value for GAB based on DDM valuation? To answer this question, we have to perform some data setup before we can proceed for the calculations.
[1] To determine what is the IRR?
IRR = Risk Free Rate + Risk Premium = 3.20% + 5.76% = 8.96%
[2] To determine the growth rate for the DPS and EPS
DPS Growth on Y1- Y5 = Min(5 Yr Adj. DPS CAGR, 10 Yr Adj DPS CAGR) = 6.77%
DPS Growth on Y6- Y10 = Min(5 Yr Adj. DPS CAGR, 10 Yr Adj DPS CAGR) = 6.77%
DPS Terminal Growth Value = 3%
EPS Growth on Y1- Y5 = Min(5 Yr Adj. EPS CAGR, 10 Yr Adj EPS CAGR) = 9.20%
EPS Growth on Y6- Y10 = Min(5 Yr Adj. EPS CAGR, 10 Yr Adj EPS CAGR) = 9.20%
EPS Terminal Growth Value = 3%
[3] To determine future P/E
P/E on Year 5 = Average P/E for Latest 10 FY = 16.273
P/E on Year 10 = Average P/E for Latest 10 FY = 16.273
[4] To determine the starting DPS and EPS
Latest DPS = Average of T4Q and Latest FY DPS = 0.685
Latest EPS = Average of T4Q and Latest FY EPS = 0.666
After finalizing the data setup on (1) - (4), we can proceed the valuation on different scenarios.
Scenario (1) : No Growth
Assumption: The company is now in the mature phase and you do not expect any growth of its earnings from now on
Intrinsic Value = Latest DPS / Discount Rate = 0.685/8.960% = 7.645
Scenario (2) : Constant Growth Dividend
Assumption: Based on a constant growth of dividend of DPS Terminal Growth Value for the rest of its economic life.
Intrinsic Value = Latest DPS * (1+DPS Terminal Growth Value) / (Discount Rate - DPS Terminal Growth Value) = 0.685 * (1+3%)/(8.960% - 3%) = 11.838
Scenario (3) : Growth on Y1-Y5 and then Constant Growth Dividend
Assumption: Growth on Y1-Y5, then based on a constant growth of dividend of DPS Terminal Growth Value for the rest of its economic life.
Scenario (4) : Growth on Y1-Y5, Y-6-Y10 and then Constant Growth Dividend
Assumption: Growth on Y1-Y5 and Y6-Y10, then based on a constant growth of dividend of DPS Terminal Growth Value for the rest of its economic life.
Scenario (5) : Growth on Y1-Y5 and then Sell the Shares
Scenario (6) : Growth on Y1-Y5, Y6-Y10 and then Sell the Shares
Below is the summary of GAB's intrinsic value bases on above scenarios.
You may check on the GAB's business quality on my earlier post, and decide should you click the buy button?
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