Dividend Analysis and Preliminary Valuation

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Week 3 Model Assignment

Section 3: Dividend Analysis and Preliminary Valuation

First and Last Name

The University of Arizona Global Campus

BUS 401: Principles of Finance

Instructor Name

Due Date

This model has many helpful tips in it to illustrate best practices in APA, tables, and writing. In keeping with UAGC’s Academic Integrity policies, be sure to construct your own assignment with originality in

writing and content. If you need help writing your assignment in your own words, reach out to the Writing Center. As always, your instructor is available to answer questions about this assignment.

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Section 3: Dividend Analysis and Preliminary Valuation

Part 1 Dividend Analysis

Over the past eleven years, PG has paid dividends quarterly. Table 6 shows PG’s annual

dividends over the past eleven years and the annual growth rate each year.

Table 6

PG’s Annual Dividends

PG

Dividend

Per Share

Annual

Growth Rate

Oct-20 $ 3.12 7.55%

Oct-19 $ 2.90 3.94%

Oct-18 $ 2.79 4.10%

Oct-17 $ 2.68 0.75%

Oct-16 $ 2.66 2.70%

Oct-15 $ 2.59 5.71%

Oct-14 $ 2.45 6.99%

Oct-13 $ 2.29 7.01%

Oct-12 $ 2.14 8.63%

Oct-11 $ 1.97 9.44%

Oct-10 $ 1.80

Note. Adapted from Business Insider, n.d.

PG’s average growth rate over the last 10 years is 5.68%. PG’s average growth rate over

the last five and three years is 3.81% and 5.20%, respectively. PG’s annual dividends have

growth every year for the past ten years, ranging from a low growth of 0.75% (in 2017) to a high

of 9.44% (in 2011). PG’s dividend growth rates declined from 9.44% in 2011 to 0.75% in 2017,

Be sure to introduce and/or explain your tables, if you include them.

Because your weekly assignments will become a part of your Final Project,

continue to number your tables based on your previous assignments. So, if there

are five tables in your previous assignments, the first table in this paper

should be Table 6.

Consider using level headings to help organize

your paper into the required parts.

Calculate the average dividend growth rate over the following periods: The most recent 10 years, 5 years, and 3 years.

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and then increased to 4.10% in 2018. In 2019, the dividend growth rate declined slightly to

3.94% from 2018’s 4.10%. Finally, in 2020, the dividend growth rate increased to 7.55%.

Upon review of the dividend growth rate data, I have selected 6.0% as the high-end

dividend growth rate. This is based on the 10-year average as well as the high growth rate in

2020. In addition, I have selected 4.0% as the low-end growth rate. This is based on the three-

year average as well as the growth rates in 2018 and 2019. These growth rate estimates are

supported by PG’s financial performance in 2020, including its high interest coverage ratio of

50.66 and the growth in sales and net income over the most recent three-year period.

Part 2 Preliminary Valuation

The constant growth formula can be used to calculate a stock price for PG. The constant

growth formula uses the most recent dividend (D), a dividend growth rate (g), and a discount rate

(r) to calculate a stock price. This formula is as follows:

Price = 𝐷𝐷 ( 1 + 𝑔𝑔)

(𝑟𝑟 − 𝑔𝑔)

For the first calculation, PG’s dividend growth rate is 4.0% (g), the low-end dividend

growth rate. The most recent annual dividend is $3.12 per share (D). As PG is a large

capitalization company, the discount rate will be 10.0% (r). Using these inputs, the calculated

stock price for PG is $54.08 per share. The calculations are shown here:

Price = $3.12 ( 1 + 0.04)

(0.10 − 0.04)

Consider using the Equation tool in Microsoft Word to write up your formulas and calculations. For help with this, see this guide: Write an Equation or Formula.

Be sure to introduce and explain your calculations.

Be sure to summarize the trend in the dividend growth rates.

Determine two distinct estimates of the future dividend growth rate for this company: a high-end growth rate and a low-end growth rate.

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Price = $3.12 ( 1.04)

(0.06)

Price = $3.2448

0.06

Price = $54.08

For the second calculation, PG’s dividend growth rate is 6.0% (g), the high-end dividend

growth rate. The most recent annual dividend is $3.12 per share (D). As PG is a large

capitalization company, the discount rate will be 10.0% (r). Using these inputs, the calculated

stock price for PG is $82.65 per share. The calculations are shown here:

Price = $3.12 ( 1 + 0.06)

(0.10 − 0.06)

Price = $3.12 ( 1.06)

(0.04)

Price = $3.3072

0.04

Price = $82.68

The most recent stock price for PG is $143.30, as of November 16, 2020 (Yahoo!

Finance, n.d.). Both the low-end and high-end value calculations using the constant growth

formula are below the current market price for PG. This indicates that the market price for PG is

over-valued.

Based on this analysis, the concluded value for PG is $82.68 per share. This conclusion

uses 6.0% as the dividend growth rate, which based on the company’s strong interest coverage

ratio, and increases in revenues and net income over the past three years. This concluded value is

Show your calculations of the constant growth formula step by step.

In a similar manner, calculate another estimate of the stock price for your

selected company using the constant growth formula and the high-end

dividend growth rate.

Don’t forget to show all your calculations step by step.

Compare each of the two stock prices you calculated in Part 3 to the current stock price per share

of the company.

Determine your concluded stock price and justify this conclusion.

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below the PG current market price of $143.30, which suggests the stock is currently overvalued

on the market.

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References

Markets Insider. (n.d.). Procter & Gamble Co.: Stock, PG. Business Insider. Retrieved on

December 3, 2020, from https://markets.businessinsider.com/stocks/pg-stock

Yahoo! Finance. (n.d.). The Procter & Gamble Company (PG). Retrieved on December 3, 2020,

from https://finance.yahoo.com/quote/PG/

Be sure to include a references list that cites where you got your information

from.