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6.1.1 Dividend Discount Model (DDM)

The dividend discount model (DDM) is used to evaluate a company's stock price by using estimated dividends and and discount them back to present value. It valuates the price of a stock based on the net present value of predicted future dividends.

DMM is most commonly used to calculate share price. The main advantage of it is that it is very easy to understand as it values a company stock without taking into consideration of market condition and users can make comparison across various industries or different companies

The disadvantages of the DDM is that it is not applicable to companies which does not pay dividends. Some companies will choose to reinvest its capital on other projects which will increase its profitability as compared to paying out its dividends. Furthemore, It does not take into account other factors such as brand equity, customer loyalty and retention rate and intangible assets, all of which increase the value of a company. DMM relies mostly on the assumption that a company's dividend growth rate is stable and known.

However, DDM can be used to evaluate the value of more established firms so as to determine if their share price is undervalued, overvalued or correctly valued. The equation shown below assumes that dividends are relative to the constant growth rate(g):

FIGURE 7.10

DBS Group Holdings Ltd's Dividends Per Share for the three months ended in Sep. 2015 was $0.60 Based on the table below, Based on the table below, we noted that DBS dividends has only increased slightly from $0.56 in 2011 to $0.60 in 2015. This means that the dividend payout has increased 7.14% over a 5 year period.

	2011	2012	2013	2014	2015
DBS dividends per share	$0.56	$0.56	$0.58	$0.58	$0.60
Growth	N/A	0.00%	3.57%	0.00%	3.45%

FIGURE 7.11: Share Growth

The reason why DBS has not increased is dividend payout largely over the years is because the corporate management feels that it is more important to pay sustainable dividends over time and achieve their long term growth. Despite the fact that DBS had achieved net profit of S$4.05 billion in 2014 and that it was the first time that the group surpassed $4 billion in total net profit, they had still paid a final dividend of $0.58 per share which was the same amount paid to shareholders back in 2013.

Although DBS has not provided direction for future dividend prices for shareholders, we can speculate future rising growth rates based on the following :

· Historical dividend payouts

· Payout ratios

· Managing expenses

· Healthy portfolio

· Impact of oil prices

In addition, several assumptions were made with regards to the forecasted growth rate :

· DBS bank are being prudent and prepared by managing expenses, building reserves, holding strong capital and working with their clients proactively.

· For the slightly lower growth in 2016, it might be due to the challenging environment such as china’s slowdown creating headwinds, policy actions creating uncertainty, commodity cycle creating stresses and seeing slow down which results in a growth rate of merely 5.81%.

· Canada will grow slightly slower than the U.S. due to its concentration in oil and other commodities

· Mexican growth would be strong due to low inflation and unemployment, with the country having good prospects.

· Japan economy relapsed into recession although they have low unemployment

· India’s growth remained solid, although they have a slight decrease in capital spending, consumer spending paired with low commodities pricing makes up for it

Based on those assumptions, though facing a challenging environment, DBS’s preparedness coupled with the world’s positive impact on the economy would provide a constant growth rate in dividends for forecasted time period 2015-2017.

FORECASTED DBS DIVIDEND GROWTH (2015 - 2017)

		Return of Equity	Retention rate	Dividend Growth (ROE x RR)
	2010	5.62%	46.99%	2.64%
	2011	9.48%	59.54%	5.64%
	2012	13.31%	66.01%	8.79%
	2013	7.65%	64.48%	4.93%
	2014	12.06%	64.92%	7.83%
Constant	2015(F)	10.36%	65.77%	6.81%
Slow	2016(F)	9.62%	60.39%	5.81%
Constant	2017(F)	10.20%	66.20%	6.75%

FIGURE 8.12: DBS Dividend Growth (2011-2017)

Phase 1(2015):Constant Growth	Phase 2(2016):Slow Growth	Phase 3(2017):Constant Growth
Dividend growth rate of 6.81%	Dividend growth rate of 5.81%	Dividend growth rate of 6.75%

FIGURE 8.13: Phases of forecasted Growth

According to the data above, the growth rates for each phase would be slightly different while having a constant growth trend. Growth of 6.81%(constant) in 2015, 5.81% in 2016(slow) and finally back to a relatively constant 6.75% in 2017(constant). This trend is also reflected in the world GDP forecasted.