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

Why You Should Be Concerned About CMS Energy Corporation’s (NYSE: CMS) Dividends

in DIVIDENDS by

CMS Energy Corporation (NYSE: CMS) currently pays a dividend yield of 3.2% which is below the Utilities sector median of 3.4%. While this makes the total return potential for CMS Energy look uninviting, investors may change their mind when analyzing the company’s future dividends. In this article, I calculate CMS Energy’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 CMS Energy? 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. CMS Energy’s debt to equity ratio has been relatively stable over last few years ranging from 233.9% to 238.3%. 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 CMS Energy pays a dividend and if so, is its payout ratio relatively high (typically above 75%)? The table below highlights this information.

CMS Energy Payout Ratio Table

Source: CMS Energy dividend discount model

CMS Energy distributed a total of $377 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 82.0%. It appears that the company meets both criteria. Therefore, it is fitting to use a dividend discount model when determining the fair value of CMS Energy stock.


Forecasting CMS Energy’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 April 9, 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 $873 million by fiscal year 2022.

CMS Energy Net Income Growth Chart

Source: CMS Energy 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 62.0% for the next fiscal year which is in line with historical levels.

CMS Energy Dividend Forecast

Source: CMS Energy dividend discount model


Calculating CMS Energy’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 CMS Energy to be 9.7% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s CMS Energy WACC model page.

CMS Energy Dividend Fair Value Conclusion

The assumptions used in the dividend discount model calculate a fair value per share for CMS Energy of $37.67, -16.9% below its current stock price of $45.10. Therefore, CMS 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 CMS Energy 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 CMS Energy to gain a better understanding of its future prospects.


Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlaceBenzingaValueWalkAAIIBarron’sSeeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

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.

Discounting Waddell & Reed Financial, Inc.’s (NYSE: WDR) Future Dividends To Estimate Fair Value

in DIVIDENDS by

Waddell & Reed Financial, Inc. (NYSE: WDR) has distributed 109.0% 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 financial firm paying a dividend yield of 5.2%, could the small-cap stock be trading at an attractive valuation? Let’s take a look at the future dividend potential of Waddell & Reed 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 Waddell & Reed, 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. Waddell & Reed’s debt to equity ratio has been relatively consistent over last few years with a range spanning only 0.7%. 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 Waddell & Reed pays a dividend and if so, is its payout ratio relatively high (typically above 75%)? The table below provides this information in more detail.

Waddell & Reed Payout Ratio Table

Source: Waddell & Reed dividend discount model

Waddell & Reed distributed a total of $154 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 109.0%. It appears that the company meets both criteria. Therefore, it is fitting to apply a dividend discount model when calculating the intrinsic value of Waddell & Reed.


Projecting The Future Dividends Of Waddell & Reed

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 24.4%, then decline -3.3% in 2019 and rise 4.5% in 2020.

Waddell & Reed Net Income Growth Chart

Source: Waddell & Reed 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 61.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Waddell & Reed Dividend Forecast

Source: Waddell & Reed dividend discount model


Calculating Waddell & Reed’s Intrinsic Value

Finally, we can now calculate Waddell & Reed’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 Waddell & Reed to be 12.9% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Waddell & Reed WACC model page.

Waddell & Reed Dividend Fair Value Conclusion

My dividend forecast and cost of capital assumptions imply a fair value per share for Waddell & Reed of $14.68, -23.9% below its current stock price of $18.98. Therefore, WDR 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 Waddell & Reed 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 Waddell & Reed to gain a better understanding of all the factors driving its share price.


Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

  • Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
  • Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets.

Andy can be reached at andy@finbox.io.

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 Manulife Financial Corporation (USA) (NYSE: MFC) Stock?

in DIVIDENDS by

Manulife Financial Corporation (USA) (NYSE: MFC) is currently paying investors an above average dividend yield of 3.7% while the Financials sector median stands 2.2%. Even though this makes Manulife Financial look attractive relative to its peers, it’s useful to understand the company’s future dividend potential. Will Manulife Financial’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 Manulife Financial, 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. Manulife Financial’s debt to equity ratio has stayed relatively stable over last few years hitting a low of 4.7% in December 2015 and a high of 14.5% 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 Manulife Financial pays a dividend and if so, is its payout ratio relatively high (typically above 75%)? This helps figure out if the company distributes the majority of its profits to shareholders in the form of dividends.

Manulife Financial Payout Ratio Table

Source: Manulife Financial dividend discount model

Manulife Financial paid out a total of $1,373 million in cash dividends to shareholders in its most recent fiscal year Dec-17 representing a payout ratio of 91.5%. Therefore, it is fitting to use a dividend discount model when calculating the intrinsic value of Manulife Financial stock.


How To Project Manulife Financial’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 28% bringing net income to $5,218 million by fiscal year 2022.

Manulife Financial Net Income Growth Chart

Source: Manulife Financial 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 57.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Manulife Financial Dividend Forecast

Source: Manulife Financial dividend discount model


Discounting Manulife Financial’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 9.3% 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 Manulife Financial WACC model page.

Manulife Financial Dividend Fair Value Conclusion

In conclusion, my dividend discount model calculates a fair value per share for Manulife Financial of $26.26, 44.2% above its current stock price of $18.26. MFC 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.


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.

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 Manulife Financial currently appear to be undervalued based on its future dividend potential alone. This means that MFC may have significantly more upside than what I’ve calculated above.

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 Manulife Financial to gain a better understanding of its underlying fundamentals.


Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

  • Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
  • Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets.

Andy can be reached at andy@finbox.io.

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 Excited About Novartis AG’s (NYSE: NVS) Dividends

in DIVIDENDS by

Novartis AG (NYSE: NVS) has distributed 84.3% 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 healthcare firm paying a dividend yield of 3.7%, could the large-cap stock be trading at an attractive valuation? Let’s take a look at the future dividend potential of Novartis AG 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 Novartis AG, 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. Novartis AG’s debt to equity ratio has been relatively consistent over last few years with a range spanning only 10.0%. 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 determine if Novartis AG pays a dividend and if so, is its payout ratio relatively high (typically above 75%)? The table below provides this information in more detail.

Novartis AG Payout Ratio Table

Source: Novartis AG dividend discount model

Novartis AG distributed a total of $6,495 million in cash dividends to shareholders in its most recent fiscal year Dec-17 which represented a payout ratio of 84.3%. It appears that the company meets both criteria. Therefore, it is fitting to apply a dividend discount model when calculating the intrinsic value of Novartis AG.


Projecting The Future Dividends Of Novartis AG

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 61.8%, then grow 5.7% in 2019 and rise 7.1% in 2020.

Novartis AG Net Income Growth Chart

Source: Novartis AG 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 68.0% payout ratio in 2018 and hold it steady there throughout the remainder of my projection period.

Novartis AG Dividend Forecast

Source: Novartis AG dividend discount model


Calculating Novartis AG’s Intrinsic Value

Finally, we can now calculate Novartis AG’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 Novartis AG to be 9.3% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Novartis AG WACC model page.

Novartis AG Dividend Fair Value Conclusion

My dividend forecast and cost of capital assumptions imply a fair value per share for Novartis AG of $93.98, 16.2% above its current stock price of $81.46. NVS 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

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

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 Novartis AG to gain a better understanding of all the factors driving its share price.


Author: Brian Dentino

Expertise: financial technology, analyzing market trends

Brian is a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to research stock fundamentals. Brian’s background is in physics & computer science and previously worked as a software engineer at GE Healthcare. He enjoys applying his expertise in technology to help find market trends that impact investors.

Brian can be reached at brian@finbox.io.

As of this writing, Brian 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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