Dividend Discount Model Research Articles

How helpful is the Dividend Discount Model in understanding the stock market? What are some of its limitations?

The background of this article is under an era where more and more people start learning how to manage their wealth in order to generate more gains, such as investing in stocks. The purpose of this article is to provide the audience a classical model called Dividend Discount Model, which could help them value their stocks and thus make smarter investment decisions. However, this model is not perfectly workable due to the complexity of real-world financial markets. Therefore, this article would critically evaluate the effectiveness of this model and provide a more flexible model as a reference for the audience to make investment.

Financial Performance and Stock Valuation of Tobacco Company in Indonesia Stock Exchange (IDX) Amidst the Hike of Excise Tax Rate Period 2017-2021

In the tobacco sector, there was a consistent decline in the price of shares outstanding during 2017 – 2021. The consistent decline in stock prices in the market in the tobacco sector initiated the author to analyze the financial performance condition of all companies in the tobacco sector and the stock valuation of companies with the best financial performance compared to other companies. So, it can be concluded that the market price position is now undervalued or still in an overvalued position to be the basis for making investment decisions. In this study, the financial performance of tobacco companies will be analyzed using the method of the decree of the Ministry of State-Owned Enterprises (SOEs) or decree No. KEP-100 / MBU / 2002. This method will result in the health level status (Healthy, Less Healthy, Unhealthy) of each tobacco company each year in the period 2017 to 2021. Stock valuation in companies with the healthiest company predicate from the tobacco sector on the Indonesian stock exchange for the 2017-2021 period. The Stock Valuation that will be used is the absolute and relative method. In the absolute method, the researcher used the discounted cash flow (DCF) method and Dividend Discount Model (DDM). As for the relative method, the researcher used Price to Book Value (PBV), Price to Earnings Ratio (PER), and EV/EBITDA. Based on PBV, PER, and EV/EBITDA, the intrinsic value of HMSP is Rp. 660.56, Rp. 1,093.53, and Rp. 1,104.57, respectively. DCF generates a result of IDR 1,301.35, and DDM gets IDR 1,375.53. Since only the PBV results reveal overvalued outcomes when compared to the market price, even though the share price is still Rp 915, it can be said that the market price of HMSP’s shares is undervalued. As a result, the researcher suggests investing in HMSP shares. The suggestion is being made because there is a chance for investors to profit from capital gains and dividends because the market price of HMSP is still undervalued in comparison to its underlying worth.

From the Editor

Sustainable growth is one of the key inputs in the income approach. I have seen wide variation in practice over time with respect to selection of a sustainable growth rate ranging from long-term targets for inflation, expected industry growth rates, T-Bond yields and expected growth of the Gross Domestic Product. This list is clearly not exhaustive; I have seen many different variations with high growth companies. Shannon Pratt illustrated the significance of the long-term growth rate in the following passage from Valuing a Business:As the example illustrates, minor differences in sustainable growth rates can have very significant impacts on an opinion of value. This issue contains two papers that directly address the issue of sustainable growth. Dr. Gene Trevino analyzes the issue from the standpoint of the accuracy of using historical industry growth rates, historical gross domestic product growth rates and expected inflation rates as sustainable long-term growth rates, while Dr. Brad Cornell and Richard Gerger approach the topic by analyzing historic growth of public companies. Their findings are surprisingly similar.David Neuzil and Joe Thompson revisit the Value Driver Formula and illustrate short-comings of a traditional Gordon Growth Model in valuing a business that invest heavily in research and development.Finally, the issue has a Special Report from the International Valuation Standard Council (“IVSC”) on Environmental, Social and Governance (“ESG”) issues in valuation. The IVSC has been busy developing technical resources for valuation professional in the evolving area of ESG and its application in business valuation. The Special Report provides an overview of those resources and ongoing work in the area.To all our readers, enjoy the issue and let me know if you have any strong opinion or further thoughts on our articles – letters to the editor are welcome.

Analisis Penetapan Harga Intrinsik Saham sebagai Dasar Pengambilan Keputusan Investasi dengan Menggunakan Dividend Discount Model

This study aims to analyze the intrinsic price of stock as a basic for an investment decision making by using Dividend Discount Model. The population used in this study were all companies listed in Kompas100 Index during the period 2015-2019. Based on the purposive sampling method, 19 companies were obtained as samples in this study. Type of this study is a descriptive method with a quantitative approach. The result based on Dividend Discount Model show that BBTN, BMRI, PGAS, PWON, TLKM stocks are in undervalued condition so it is advisable to buy these stocks. ACES, BBNI, BBRI, CTRA, INTP, JSMR, KLBF, PTBA, SCMA, UNTR, UNVR, WIKA stocks are in overvalued condition so it is advisable to sell these stocks immediately. ADHI and BJTM stocks are in correctly valued condition so it is advisable to hold these stocks
 
 Keywords: Intrinsic Price; Dividend Discount Model; Investment Decision

DIVIDENDS AND COMPOUND POISSON PROCESSES: A NEW STOCHASTIC STOCK PRICE MODEL

This study introduces a stochastic multi-period dividend discount model (DDM) that includes (i) a compound nonhomogenous Poisson process for dividend growth and (ii) the probability of firm default. We obtain maximum likelihood (ML) estimators and confidence interval formulas of our model parameters. We apply the model to a set of firms from the S&P 500 index using historical dividend and price data over a 42-year period. Interestingly, stock price estimations calculated with the model are close to the observable prices. Overall, we prove that the model can be a useful tool for stock pricing.

Let's Get Real About the Dividend Discount Model

Let's Get Real About the Dividend Discount Model

BUSINESS VALUATION WITH IRREGULAR CAPITAL EXPENDITURES

Introduction. The assumption of steady-state annual growth in perpetuity may be justified for cash flows from business operations. However, this assumption is less justified for capital expenditures, which are inherently irregular expenditures on long-term assets. In addition, the irregularity of capital expenditures is a particular characteristic of capital-intensive industries, infrastructure businesses, real estate businesses, and small and medium-sized businesses. To estimate business value in such cases, we propose an improvement that makes the method of discounted cash flows more universal and reliable. The purpose of the article is to derive a formula for normalization of irregular capital expen­ditures taking into account the impact of inflation and real growth. Results. Business valuation methodology has been complemented with an improvement, which is the formula for normalizing irregular capital expenditures in terminal year. The correct­ness of the normalization formula is verified by a simulated valuation model of discounted cash flows with a long forecast period. The model indicates that the rules of thumb, such as equating capital expenditures to depreciation, are a source of inaccuracy in business valuations, while the proposed normalization formula is a solution for justified valuation without restrictive and, in many cases, unrealistic assumptions of infinite divisibility and even renewal of fixed assets. Conclusions. The proposed normalization formula increases the reliability of business valuation with irregular capital expenditures and makes the DCF valuation with Gordon growth model more universal.

Comparison of Dividend Discount Model With Free Cash Flow To Firms For Valuation of Banking Stocks Listed in Jakarta Islamic Index (JII) Period 2016-2020

This study aims to find out and analyze the fair value of stocks and stock conditions in banking companies using dividend discount model (DDM) and free cash flow to firms (FCFF) during the 2016 – 2020 period. The population is in research in as many as 70 companies. Determination of samples with purposive sampling techniques, so that the samples obtained by 2 companies. The data used is secondary data and calculations by using Microsoft Excel 2016 application. The results showed that of the 2 banking companies listed in JII, bris and BTPS shares have different intrinsic values. Valuation Results using DDM show that the intrinsic value of BRIS Shares is in an Overvalued condition, for BTPS shares are undervalued. While the valuation result using FCFF obtained intrinsic value of BRIS shares is undervalued, for BTPS shares is in an Overvalued condition.

The Effect of the Financial Crisis on Investment Projects Case Study: Kurdistan Region of Iraq

Domestic and international investments are critical for a country's economic growth since they facilitate the transfer of technology, job creation, increase the exports of goods, and services. The financial crisis in Kurdistan region has several economic consequences for domestic and foreign investments, especially on the investment projects throughout: the rate of capital, the numbers of projects, the rate of sectors distribution, nationality investors and the distribution of projects on governors. Since 2014, the Kurdistan region faced financial and economic crisis, which had a huge negative effect on investment projects. As a result, the influence of the investment projects of economic development suffered from fluctuation and instability. This study attempts to evaluate the effect of financial crises on investment projects in Kurdistan regional which are implemented by domestic and foreign investors. To accomplish this objective the statistical technique and economic analysis was applied for annual time series data from 2006 to 2017 by applying the compound annual growth rate Gordon growth model (CAGR). This study finds that the financial crisis has a huge negative effect on local and international investment initiatives.

VALUATION ANALYSIS OF STOCK VALUE OF PULP & PAPER INDUSTRY COMPANIES USING DISCOUNTED CASH FLOW VALUATION AND RELATIVE VALUATION METHODS FOR DECISION MAKING FOR THE 2015-2019 PERIOD

This study aims to determine how much the intrinsic value of PT. Indah Kiat Pulp & Paper Tbk. (INKP), Tjiwi Kimia Paper Factory Tbk. (TKIM) and Fajar Surya Wisesa Tbk. (FASW) listed on the IDX in 2015-2019 where the stock valuation is calculated using the Dividend Discount Model, Free Cashflow to Equity and Price Book Value methods to determine whether the company's stock is undervalued or overvalued, making the right decisions for potential investors based on value. intrinsic value and knowing which method is the most accurate. The sample in this study were three companies that had complete financial statements and distributed dividends during the research year and had the most significant spike in stock prices. Data collection techniques in this study using purposive sampling technique and the data used is secondary data. The conclusion in this study is that in general, INKP and TKIM stocks are undervalued and FASW is in overvalued condition. The most accurate stock valuation method in this study is the Price Earning Ratio because it has the smallest RMSE value.

Valuation of Intrinsic Value of Construction Sector Stock Using Residual Income Model (RIM) and Dividend Discount Model (DDM)

This study aims to determine and analyze the intrinsic value valuation, consistency and influence of the intrinsic value of the shares of construction sector companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2019. The sample selection technique used in this study is full sampling and obtained as many as 12 companies with a total number of research samples is 48 samples. The data analysis technique used in this research is descriptive analysis using Microsoft Excel 2016 software and hypothesis testing was carried out using Panel Data Regression Analysis using E-Views version 9.0 software with a significance level of 5%. The results obtained in this study are (1) Based on the results of the consistency test carried out on the research sample using the Residual Income Model (RIM) and Dividend Discount Model (DDM) methods, the results of the consistency percentage are 47.92% consistent and 52.08 % inconsistent. (2) The intrinsic value of the shares calculated using the RIM method has no effect on the share price. (3) The intrinsic value of shares calculated using the DDM method has a positive and significant effect on stock prices.”

Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment

ABSTRACTWe define a sentiment indicator based on option prices, valuation ratios, and interest rates. The indicator can be interpreted as a lower bound on the expected growth in fundamentals that a rational investor would have to perceive to be happy to hold the market. The bound was unusually high in the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. Our approach exploits two key ingredients. First, we derive a new valuation ratio decomposition that is related to the Campbell–Shiller loglinearization but that resembles the Gordon growth model more closely and has certain other advantages. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.

The Fair Price of Company Shares with Dividend Discount Model Method

This study aims to analyze the fair price of company shares in the LQ45 index with the dividend discount model (DDM) method during the 2014-2018 period. The analysis methodology using is a descriptive qualitative with data obtained from the Indonesia Stock Exchange with a case study approach, namely the 2014-2018 LQ45 Stock Price through LQ45 Stock Price Assessment analysis with the using Dividend Discounted Model (DDM) Method. The results of this study indicate that the fundamental analysis using the Dividend Discount Model (DDM) can be done after the intrinsic value of the stock is known then compared to its fair price so that it can be determined whether the stock is undervalued, fairvalued or overvalued.Penelitian ini bertujuan menganalisa harga wajar saham perusahaan yang berada pada indeks LQ45 dengan metode dividend discount model (DDM) selama periode 2014-2018.Metodologi penelitian yang digunakan adalah metode deskriptif kualitatif dengan data series dan cross section dengan pendekatan studi kasus (case study) yakni pada Harga Saham LQ45 Tahun 2014-2018 melalui analisis Penilaian Harga Saham LQ45 dengan Dividend Discounted Model (DDM). Hasil dari penelitian ini menunjukkan bahwa secara analisis fundamental dengan menggunakan metode Dividend Discount Model (DDM) dengan metode Constant Growth Model dapat dilakukan setelah nilai intrinsik saham sudah diketahui kemudian dibandingkan dengan harga wajarnya sehingga dapat ditentukan apakah saham berada dalam kondisi undervalued, fairvalued atau overvaluedDOI: https://doi.org/10.26905/afr.v4i1.5960

International Real Estate Review

We apply the dynamic Gordon growth model to the Hong Kong real estate market to analyze quarterly data on four kinds of real estate—housing, office, retail, and factory properties—from 1999 to 2020. We find that factories have the highest total returns among the four types of real estate, and also a larger Sharpe ratio. The total returns of these four kinds of real estate are highly correlated. The results of an autoregressive distributed lag model show that the gross domestic product growth rate is the key determinant of real estate returns, while changes in foreign direct investment also influence housing and retail returns. The expected value of the risk-free rate is the key factor that determines the rent-price ratio. The decline in the risk-free rate in Hong Kong is the main reason that the real estate price-rent ratio has increased from 20 to 40 in the last twenty years. Our research represents an early contribution that compares the performance of housing and commercial real estate at the city level, with both types of real estate having similar determinants. Finally, we find that the fall in risk-free interest rates worsens housing affordability in Hong Kong.

Accuracy of dividend discount model and p/e ratio valuation in Indonesia stock exchange

The calculation of the intrinsic value of shares is essential for investors. The result can be used as a guideline for buying, selling, or holding shares. This research was conducted because the stock price on the Indonesia Stock Exchange (IDX) in March 2020 experienced a deep decline, namely a decrease of 38% on average, so it is interesting to study. In determining the intrinsic value of these shares, the Dividend Discount Model (DDM) and Price Earning Ratio (P/E Ratio) methods will be used as well as evaluate the most accurate method. The study uses stock data from all business sectors on the IDX for the 2014-2019 period, especially companies that pay dividends. The sample used in this study were 49 companies (22%) of the average 222 companies that distributed dividend. Based on the results of the study, DDM, and P/E Ratio there are 43 companies (86%) in undervalued positions or only seven overvalued companies (10%). MOS is greater than 30% with DDM and P/E Ratio of 26 companies (52%). Likewise, with the results of the accuracy-test using the Mean Absolute Pricing Error (MAPE), it turns out that DDM is only 0.14% greater than the P/E Ratio. It can be said that DDM is relatively more accurate than the P/E Ratio. Thus overall the calculation of the intrinsic value of shares using DDM and the P/E Ratio in terms of undervalued or overvalued, MOS and accuracy can be concluded that there is no significant difference.

Financial Analysis of an Australian Department Company Based on 3 Financial Models

In the modern economic market, it is necessary for investors and decision makers to evaluate the financial situation of enterprises. For the managers, the analysis of financial statements can help to judge the development prospects of enterprises, so as to manage and make decisions on the future development direction. And investors can get the accurate business results of the enterprise this year, which has important reference significance for whether to invest in the enterprise. The purpose of this report is to analyze the Australian department store, Myer, its financial status and provide investment advice to potential investors and operating suggestions to its managers. Three financial models were used to analyze the value of Myer, which are comparable analysis (COMPS), dividend discount model (DDM) and discount cash flow (DCF) models respectively.

Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment

We define a sentiment indicator that exploits two contrasting views of return predictability, and study its properties. The indicator, which is based on option prices, valuation ratios and interest rates, was unusually high during the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. We interpret it as helping to reveal irrational beliefs about fundamentals. We show that our measure is a leading indicator of detrended volume, and of various other measures associated with financial fragility. We also make two methodological contributions. First, we derive a new valuation-ratio decomposition that is related to the Campbell and Shiller (1988) loglinearization, but which resembles the traditional Gordon growth model more closely and has certain other advantages for our purposes. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.

Market Pricing of Fundamentals at the Shanghai Stock Exchange: Evidence from a Dividend Discount Model with Adaptive Expectations

We study market pricing of fundamentals at the Shanghai Stock Exchange, incorporating possible irrational pricing behavior with adaptive expectation. Using panel data of listed stocks to overcome the limited information in aggregate time series data, we estimated key parameters of the price elasticity of dividends and the expectation adjustment based on a linear dynamic panel data model. We use a major subset of stocks with stationary real prices and cash flows and apply methods that correct for incidental parameter bias. The resulting price elasticity of dividends is about 0.46 (0.35) based on annual (quarterly) data, which is sizable given high PD (PE) ratios in the market. Our results imply that slow expectation adjustment contributes to “bubble-like” price patterns. We also show prices significantly react to macro information related to the discount rate, but these effects are very sensitive to the information set used.

A Brief Overview of the IPO Valuation Methods

The method adopted for pricing in an Initial Public Offering is a key issue in the studies on business valuation. In particular, various researches sought to verify which valuation methodologies are preferable in the context of an initial public offering. 
 
 The review of the main literature shows that Discounted Cash Flow, Market Multiples, Dividend Discount Model and, even if just to some degree, Economic Value Added are the most popular methodologies in the valuation practice. 
 
 The comparison among different valuation methods, proposed in the literature and variously applied in national and international practices, reveals the necessity to pay more attention to valuation mechanisms that drive the pricing of the shares to be listed.
 
 The topic is linked to the ever more pertinent debate on the use of different methods in professional practice: financial experts and analysts tend, in fact, to compare results according to different estimates.

The relevance of valuation models: insights from Palestine exchange

Purpose This paper aims to investigate the relevance of two groups of valuations models as follows: the accounting models based on the residual income (RIM) and the standard market model, on equity price, return and volatility relevance. Design/methodology/approach The models are tested on companies traded on Palestine exchange from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the market model and four volatility models. Findings The standard RIM outperformed other models in equity price modeling. The dividend discount model (DDM) outperformed the rest of the models in terms of return estimation. However, the authors find that the market model can explain equity variance better than RIM and DDM models. Practical implications For investors, market beta does not necessarily capture all relevant factors of value and traditional financial statements are still important in providing relevant information and different models are used for different values perspectives (price, return and volatility). Originality/value Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality, namely, the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models and adding Volatility dimensions of relevance.