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Forecasting future dividend distributions to see if there is any catalyst for a price change.

Discounting PPL Corp’s (NYSE: PPL) Future Dividends To Estimate Fair Value

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PPL Corp (NYSE: PPL) currently pays a dividend yield of 6.1% which is above the Utilities sector median of 3.5%. While this makes the total return potential for PPL Corp look attractive, investors may change their mind when analyzing the company’s future dividends. In this article, I calculate PPL Corp’s fair value by forecasting its dividend distributions and discounting them back to today’s value.


Valuation Methodologies Are Not Made Equally

The Dividend Discount Model (DDM) estimates the value of a company’s stock price based on the theory that its worth is equal to the sum of the present value of its future dividend payments to shareholders.

But how do we know if it’s appropriate to use a dividend discount analysis when estimating the fair value of PPL Corp? Many analysts find it difficult when trying to figure out the correct valuation methodology for a given company or are biased towards one specific approach. This is often a mistake which can negatively impact investment decisions and result in trading losses or missed opportunities. No two companies are the same and every business consists of unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. PPL Corp’s debt to equity ratio has been relatively stable over last few years ranging from 194.5% to 201.3%. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

The next step is to figure out if PPL Corp pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? The table below highlights this information.

PPL Corp Payout Ratio Table

Source: PPL Corp dividend discount model

PPL Corp distributed a total of $1,072 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 95.0%. It appears that the company meets both criteria. Therefore, it is fitting to use a dividend discount model when determining the fair value of PPL Corp stock.


Forecasting PPL Corp’s Dividends

The first step in building a dividend discount model is to forecast net income since forecasting dividends directly can be difficult. So let’s create a net income forecast for the next five years and use that as the basis for projecting future dividends.

As of May 21, Wall Street analysts are projecting a healthy growth rate in the company’s bottom-line over the next five years. Net income is expected to reach $2,053 million by fiscal year 2022.

PPL Corp Net Income Growth Chart

Source: PPL Corp Projected Net Income Growth

I use the net income projections above to serve as the basis for my dividend forecast. The next step is to forecast the payout ratio where I selected 78.0% for the next fiscal year which is in line with historical levels.

PPL Corp Dividend Forecast

Source: PPL Corp dividend discount model


Calculating PPL Corp’s Fair Value

The last step is to select a discount rate to calculate the present value of the forecasted dividends. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I determined a reasonable discount rate for PPL Corp to be 10.9% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s PPL Corp WACC modelpage.

PPL Corp Dividend Fair Value Conclusion

The assumptions used in the dividend discount model calculate a fair value per share for PPL Corp of $29.80, 11.5% above its current stock price of $26.92. PPL appears to be an undervalued stock based on the company’s future dividend potential alone. Therefore, now may be a good time to purchase shares or increase your position in the company.


Conclusion: Dividends Support A Higher Stock Price

Discovering the fair value of a company can sometimes be difficult. However, determining an appropriate valuation methodology should not be. Knowing when and when not to use the dividend discount model will help in your investment decision making process.

However, it’s important to understand that a dividend discount model will inherently undervalue a stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. Meaning the approach does not capture value that would otherwise build up as cash on the balance sheet. In practice, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

Understanding that this approach calculates a conservative intrinsic value estimate is a very promising sign for investors searching for an entry point to buy the stock. Shares of PPL Corp currently appear to be undervalued based on its future dividend potential alone. This means that PPL may have significantly more upside than what I’ve calculated above.

Note that there are a number of fundamental factors I have not considered in this analysis. I recommend that you continue your research on PPL Corp to gain a better understanding of its future prospects.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Can Dividend Investors Find Value In National Health Investors Inc (NYSE: NHI) Stock?

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National Health Investors Inc (NYSE: NHI) has distributed 96.0% of its profits in the form of dividends over the last twelve months making the stock a prime candidate to be valued using a dividend discount analysis. Operating as a real estate firm paying a dividend yield of 5.8%, could the mid-cap stock be trading at an attractive valuation? Let’s take a look at the future dividend potential of National Health to see if there is any catalyst for a price change.


Application Of The Dividend Discount Model

The Dividend Discount Model (DDM) is a dividend-based valuation model that estimates the present value of a stock based on assumptions about its future dividend performance.

But before discussing the assumptions used in my dividend discount model for National Health, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts find it difficult when trying to figure out the correct valuation methodology for a given company or are biased towards one specific approach. This is often a mistake which can negatively impact investment decisions and result in trading losses or missed opportunities. No two companies are the same and every business consists of unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. National Health’s debt to equity ratio has been relatively consistent over last few years with a range spanning only 12.2%. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

The next step is to determine if National Health pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? The table below provides this information in more detail.

National Health Payout Ratio Table

Source: National Health dividend discount model

National Health distributed a total of $153 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 96.0%. It appears that the company meets both criteria. Therefore, it is fitting to apply a dividend discount model when calculating the intrinsic value of National Health.


Projecting The Future Dividends Of National Health

The first step in building a dividend discount model is to forecast net income since forecasting dividends directly can be difficult. So let’s create a net income forecast for the next five years and use that as the basis for projecting future dividends.

Finbox.io applies consensus Wall Street estimates for the net income forecast when available. For the next fiscal year 2018, profits are expected to increase 1.6%, then grow 9.2% in 2019 and rise 5.0% in 2020.

National Health Net Income Growth Chart

Source: National Health Projected Net Income Growth

I use the projections above to serve as the basis for my dividend projections. The next step is to forecast the company’s payout ratio. In my estimates shown in the table below, I select a 90.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

National Health Dividend Forecast

Source: National Health dividend discount model


Calculating National Health’s Intrinsic Value

Finally, we can now calculate National Health’s intrinsic value by present valuing its forecasted dividends. Note that we apply the company’s cost of equity to discount the future dividends since these payments are made to common shareholders or equity owners. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I determined a reasonable cost of equity for National Health to be 9.7% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s National Health WACC model page.

National Health Dividend Fair Value Conclusion

My dividend forecast and cost of capital assumptions imply a fair value per share for National Health of $59.94, -13.4% below its current stock price of $70.04. Therefore, NHI appears to be an overvalued stock and not necessarily a good entry point opportunity.


Conclusion: Dividends Don’t Support Stock Price

Finding the true value of a company can sometimes be difficult but determining an appropriate valuation methodology should not be. Knowing when and when not to use the dividend discount model will help in your investment decision making process.

But it is important to note that a dividend discount model will inherently undervalue a company’s stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. In reality, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

This helps explain, at least partially, why National Health looks like an overvalued stock based on this approach. Nevertheless, a dividend discount analysis is still a helpful tool in combination with the understanding that it calculates a conservative intrinsic value estimate. Meaning an extremely attractive opportunity would be a stock where (1) a dividend discount model is appropriate and (2) shares looks undervalued based on its future dividends.

While a dividend discount analysis on its own is not necessarily indicative of a stock’s intrinsic value, it does provide helpful insights. I recommend that investors continue their research on National Health to gain a better understanding of all the factors driving its share price.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Why Activision Blizzard, Inc’s (NASDAQ: ATVI) Dividend Potential Should Concern Investors

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Activision Blizzard, Inc (NASDAQ: ATVI) is currently paying investors a below average dividend yield of 0.5% while the Information Technology sector median stands at 1.7%. Even though this makes Activision Blizzard look uninviting relative to its peers, it’s useful to understand the company’s future dividend potential. Will Activision Blizzard’s bottom line be the main catalyst driving future growth or maybe its payout ratio? Understanding these components and how they impact value may change your mind on the company’s future prospects.


Is A Dividend Analysis Appropriate?

Dividend Discount Model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.

However, before walking through my dividend analysis for Activision Blizzard, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts are often biased towards one specific valuation approach which is typically a mistake that can negatively impact investment decisions and result in trading losses or missed opportunities. Every company has unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. Activision Blizzard’s debt to equity ratio has stayed relatively stable over last few years hitting a low of 46.4% in December 2017 and a high of 53.6% in December 2016. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

We now must determine if Activision Blizzard pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? This helps figure out if the company distributes the majority of its profits to shareholders in the form of dividends.

Activision Blizzard Payout Ratio Table

Source: Activision Blizzard dividend discount model

Activision Blizzard paid out a total of $226 million in cash dividends to shareholders in its most recent fiscal year Dec-17 representing a payout ratio of 82.8%. Therefore, it is fitting to use a dividend discount model when calculating the intrinsic value of Activision Blizzard stock.


How To Project Activision Blizzard’s Dividends

Since forecasting dividends directly can be difficult, the first step in building a dividend discount model is to project net income. So let’s create a net income forecast for the next five years and use that as the basis for our future dividends.

Applying consensus estimates, Wall Street is projecting a huge growth rate in the company’s bottom-line over the next five years. Net income is expected to grow at an average annual rate of 81% bringing net income to $5,365 million by fiscal year 2022.

Activision Blizzard Net Income Growth Chart

Source: Activision Blizzard Projected Net Income Growth

I apply the net profit estimates above to drive my dividend forecast. The next step is to project the company’s payout ratio. In my estimates shown in the table below, I select a 20.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Activision Blizzard Dividend Forecast

Source: Activision Blizzard dividend discount model


Discounting Activision Blizzard’s Future Dividends

The final step is to present value the forecasted dividend distributions using a discount rate. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I concluded a reasonable cost of equity for the company to be 11.3% at the midpoint. Although I don’t walk you through the CAPM assumptions that got me there, you can view the calculations using real-time data at finbox.io’s Activision Blizzard WACC model page.

Activision Blizzard Dividend Fair Value Conclusion

In conclusion, my dividend discount model calculates a fair value per share for Activision Blizzard of $56.42, -21.0% below its current stock price of $71.45. Therefore, ATVI appears to be an overvalued stock and not necessarily a good entry point opportunity.


What This Means For Investors

An important component of the dividend discount model that investors should understand is that the technique will inherently undervalue a stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. Meaning the approach does not capture value that would otherwise build up as cash on the balance sheet. In practice, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

This helps explain, at least partially, why Activision Blizzard looks like an overvalued stock based on this approach. Nevertheless, a dividend discount analysis is still a helpful tool in combination with the understanding that it calculates a conservative intrinsic value estimate. Meaning an extremely attractive opportunity would be a stock where (1) a dividend discount model is appropriate and (2) shares looks undervalued based on its future dividends.

Although a dividend discount model on its own is not necessarily indicative of a stock’s fair value, it does offer a number of useful insights. This valuation should only be the start of your analysis in relation to your total research. I recommend that you continue your review of Activision Blizzard to gain a better understanding of its underlying fundamentals.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

What Do The Dividends Of Getty Realty Corp (NYSE: GTY) Say About Its Intrinsic Value?

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Getty Realty Corp (NYSE: GTY) currently pays a dividend yield of 5.0% which is above the Real Estate sector median of 4.6%. While this makes the total return potential for Getty Realty look attractive, investors may change their mind when analyzing the company’s future dividends. In this article, I calculate Getty Realty’s fair value by forecasting its dividend distributions and discounting them back to today’s value.


Valuation Methodologies Are Not Made Equally

The Dividend Discount Model (DDM) estimates the value of a company’s stock price based on the theory that its worth is equal to the sum of the present value of its future dividend payments to shareholders.

But how do we know if it’s appropriate to use a dividend discount analysis when estimating the fair value of Getty Realty? Many analysts find it difficult when trying to figure out the correct valuation methodology for a given company or are biased towards one specific approach. This is often a mistake which can negatively impact investment decisions and result in trading losses or missed opportunities. No two companies are the same and every business consists of unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. Getty Realty’s debt to equity ratio has been relatively stable over last few years ranging from 68.5% to 78.0%. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

The next step is to figure out if Getty Realty pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? The table below highlights this information.

Getty Realty Payout Ratio Table

Source: Getty Realty dividend discount model

Getty Realty distributed a total of $39 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 83.3%. It appears that the company meets both criteria. Therefore, it is fitting to use a dividend discount model when determining the fair value of Getty Realty stock.


Forecasting Getty Realty’s Dividends

The first step in building a dividend discount model is to forecast net income since forecasting dividends directly can be difficult. So let’s create a net income forecast for the next five years and use that as the basis for projecting future dividends.

As of May 13, Wall Street analysts are projecting a mediocre growth rate in the company’s bottom-line over the next five years. Net income is expected to reach $70 million by fiscal year 2022.

Getty Realty Net Income Growth Chart

Source: Getty Realty Projected Net Income Growth

I use the net income projections above to serve as the basis for my dividend forecast. The next step is to forecast the payout ratio where I selected 85.0% for the next fiscal year which is in line with historical levels.

Getty Realty Dividend Forecast

Source: Getty Realty dividend discount model


Calculating Getty Realty’s Fair Value

The last step is to select a discount rate to calculate the present value of the forecasted dividends. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I determined a reasonable discount rate for Getty Realty to be 10.1% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Getty Realty WACC model page.

Getty Realty Dividend Fair Value Conclusion

The assumptions used in the dividend discount model calculate a fair value per share for Getty Realty of $20.55, -19.4% below its current stock price of $25.47. Therefore, GTY appears to be an overvalued stock and not necessarily a good entry point opportunity.


Conclusion: Dividends Don’t Support Stock Price

Discovering the fair value of a company can sometimes be difficult. However, determining an appropriate valuation methodology should not be. Knowing when and when not to use the dividend discount model will help in your investment decision making process.

However, it’s important to understand that a dividend discount model will inherently undervalue a stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. Meaning the approach does not capture value that would otherwise build up as cash on the balance sheet. In practice, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

This helps explain, at least partially, why Getty Realty looks like an overvalued stock based on this approach. Nevertheless, a dividend discount analysis is still a helpful tool in combination with the understanding that it calculates a conservative intrinsic value estimate. Meaning an extremely attractive opportunity would be a stock where (1) a dividend discount model is appropriate and (2) shares looks undervalued based on its future dividends.

Note that there are a number of fundamental factors I have not considered in this analysis. I recommend that you continue your research on Getty Realty to gain a better understanding of its future prospects.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

There’s Reason To Be Tempted By GasLog Partners LP (NYSE: GLOP) Dividends

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GasLog Partners LP (NYSE: GLOP) has distributed 95.9% of its profits in the form of dividends over the last twelve months making the stock a prime candidate to be valued using a dividend discount analysis. Operating as an energy company paying a dividend yield of 8.5%, could the small-cap stock be trading at an attractive valuation? Let’s take a look at the future dividend potential of GasLog to see if there is any catalyst for a price change.


Application Of The Dividend Discount Model

The Dividend Discount Model (DDM) is a dividend-based valuation model that estimates the present value of a stock based on assumptions about its future dividend performance.

But before discussing the assumptions used in my dividend discount model for GasLog, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts find it difficult when trying to figure out the correct valuation methodology for a given company or are biased towards one specific approach. This is often a mistake which can negatively impact investment decisions and result in trading losses or missed opportunities. No two companies are the same and every business consists of unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. GasLog’s debt to equity ratio has been relatively consistent over last few years with a range spanning only 14.5%. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

The next step is to determine if GasLog pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? The table below provides this information in more detail.

GasLog Payout Ratio Table

Source: GasLog dividend discount model

GasLog distributed a total of $90 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 95.9%. It appears that the company meets both criteria. Therefore, it is fitting to apply a dividend discount model when calculating the intrinsic value of GasLog.


Projecting The Future Dividends Of GasLog

The first step in building a dividend discount model is to forecast net income since forecasting dividends directly can be difficult. So let’s create a net income forecast for the next five years and use that as the basis for projecting future dividends.

Finbox.io applies consensus Wall Street estimates for the net income forecast when available. For the next fiscal year 2018, profits are expected to decrease -8.5%, then grow 25.7% in 2019 and rise 15.1% in 2020.

GasLog Net Income Growth Chart

Source: GasLog Projected Net Income Growth

I use the projections above to serve as the basis for my dividend projections. The next step is to forecast the company’s payout ratio. In my estimates shown in the table below, I select an 85.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

GasLog Dividend Forecast

Source: GasLog dividend discount model


Calculating GasLog’s Intrinsic Value

Finally, we can now calculate GasLog’s intrinsic value by present valuing its forecasted dividends. Note that we apply the company’s cost of equity to discount the future dividends since these payments are made to common shareholders or equity owners. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I determined a reasonable cost of equity for GasLog to be 14.4% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s GasLog WACC modelpage.

GasLog Dividend Fair Value Conclusion

My dividend forecast and cost of capital assumptions imply a fair value per share for GasLog of $25.42, 4.0% above its current stock price of $24.15. As a result, investors may conclude that they want to hold off on purchasing shares until the stock develops a wider margin of safety.


Conclusion: Dividends Support Stock Price

Finding the true value of a company can sometimes be difficult but determining an appropriate valuation methodology should not be. Knowing when and when not to use the dividend discount model will help in your investment decision making process.

But it is important to note that a dividend discount model will inherently undervalue a company’s stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. In reality, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

Understanding that this approach calculates a conservative fair value estimate may be a promising sign for investors looking to purchase shares or add to an existing position. Since GLOP looks to be trading near its intrinsic value based on the analysis above, this could actually represent a ‘downside’ case meaning an ‘upside’ case could have a much larger margin of safety.

While a dividend discount analysis on its own is not necessarily indicative of a stock’s intrinsic value, it does provide helpful insights. I recommend that investors continue their research on GasLog to gain a better understanding of all the factors driving its share price.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Forecasting Future Dividends To Value Banner Corporation (NASDAQ: BANR)

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Banner Corporation (NASDAQ: BANR) is currently paying investors an above-average dividend yield of 2.4% while the Financials sector median stands at 2.1%. Even though this makes Banner look attractive relative to its peers, it’s useful to understand the company’s future dividend potential. Will Banner’s bottom line be the main catalyst driving future growth or maybe its payout ratio? Understanding these components and how they impact value may change your mind on the company’s future prospects.


Is A Dividend Analysis Appropriate?

Dividend Discount Model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.

However, before walking through my dividend analysis for Banner, it’s first helpful to determine if this is actually an appropriate technique to be used when estimating its fair value. Many analysts are often biased towards one specific valuation approach which is typically a mistake that can negatively impact investment decisions and result in trading losses or missed opportunities. Every company has unique characteristics that may require you to adjust your analysis.

Understanding leverage trends is the first step when determining what valuation analyses are relevant for a given company. When a company’s leverage doesn’t fluctuate or is expected to remain stable over time, then an equity valuation model (e.g. equity DCF, DDM) will be the most appropriate valuation technique. The reason for this is because when leverage is stable, interest expense on debt can typically be projected with much more reliability.

How do we check if a company’s leverage has been fluctuating or is expected to do so? This isn’t always straightforward but checking recent debt ratio trends can be a good indicator. Banner’s debt to equity ratio has stayed relatively stable over last few years hitting a low of 15.3% in December 2017 and a high of 24.9% in December 2015. This suggests that an equity valuation model is a suitable technique when valuing the company’s shares. Now does it make sense to use a dividend discount model knowing that an equity valuation technique is an appropriate methodology?

We now must determine if Banner pays a dividend and if so, is its payout ratio relatively high (typically above 70%)? This helps figure out if the company distributes the majority of its profits to shareholders in the form of dividends.

Banner Payout Ratio Table

Source: Banner dividend discount model

Banner paid out a total of $66 million in cash dividends to shareholders in its most recent fiscal year Dec-17 representing a payout ratio of 108.2%. Therefore, it is fitting to use a dividend discount model when calculating the intrinsic value of Banner stock.


How To Project Banner’s Dividends

Since forecasting dividends directly can be difficult, the first step in building a dividend discount model is to project net income. So let’s create a net income forecast for the next five years and use that as the basis for our future dividends.

Applying consensus estimates, Wall Street is projecting a healthy growth rate in the company’s bottom-line over the next five years. Net income is expected to grow at an average annual rate of 19% bringing net income to $144 million by fiscal year 2022.

Banner Net Income Growth Chart

Source: Banner Projected Net Income Growth

I apply the net profit estimates above to drive my dividend forecast. The next step is to project the company’s payout ratio. In my estimates shown in the table below, I select a 28.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Banner Dividend Forecast

Source: Banner dividend discount model


Discounting Banner’s Future Dividends

The final step is to present value the forecasted dividend distributions using a discount rate. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate for the company’s cost of equity.

I concluded a reasonable cost of equity for the company to be 10.2% at the midpoint. Although I don’t walk you through the CAPM assumptions that got me there, you can view the calculations using real-time data at finbox.io’s Banner WACC model page.

Banner Dividend Fair Value Conclusion

In conclusion, my dividend discount model calculates a fair value per share for Banner of $44.62, -24.1% below its current stock price of $58.70. Therefore, BANR appears to be an overvalued stock and not necessarily a good entry point opportunity.


What This Means For Investors

An important component of the dividend discount model that investors should understand is that the technique will inherently undervalue a stock. This is typically the result of the payout ratio assumption being less than 100% implying some cash leakage. Meaning the approach does not capture value that would otherwise build up as cash on the balance sheet. In practice, this excess retained cash is usually paid out to shareholders as special dividends or to make up for cash shortfalls for future dividends during economic downturns.

This helps explain, at least partially, why Banner looks like an overvalued stock based on this approach. Nevertheless, a dividend discount analysis is still a helpful tool in combination with the understanding that it calculates a conservative intrinsic value estimate. Meaning an extremely attractive opportunity would be a stock where (1) a dividend discount model is appropriate and (2) shares looks undervalued based on its future dividends.

Although a dividend discount model on its own is not necessarily indicative of a stock’s fair value, it does offer a number of useful insights. This valuation should only be the start of your analysis in relation to your total research. I recommend that you continue your review of Banner to gain a better understanding of its underlying fundamentals.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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