Dividend Valuation Models

[Aaron]

Aaron, where did the questions come from?

Fundamentals of Investing by Gitman, Joehnk, Juchau...2nd edition. They are CFA exam questions on page 326. The other questions are easy and the answer to these two questions will be in the previous chapter. I just need to spend a bit more time to find the step(s) I keep missing. I just thought someone might easily show me where I'm going wrong. I wouldn't spend too much time on it. I will post my workings if I get it right.

[Lego_Man]

Under the Gordon Growth Model, the value at T-Zero equals:

D/(k-g)

Where:

D is the dividend at the end of the first period
k is the required Rate of Return
g is the expected growth rate

g is calculated by multiplying the Retention Rate (ie 1- Dividend Payout Ratio) and ROE.

[Lego_Man]

The second one is a little bit more tricky:

g = 0.6 x 0.15 = 0.09

D = 2

k = 0.12

Dividends start at T+3. Therefore you can apply the same model as at T+2 as above and discount the result back to its present value:

P2 = 2/(0.12-0.09) = 66.67

To discount that value back to T-0, simply divide by (1+required ROR)^T ie 1.12^2, giving you $53.14.

[Aaron]

Thanks Lego Man. I had trouble with the growth rate. I guess it makes sense that what is not paid out as dividends will grow depending on the Return on Equity. Seems simple now, thanks.

[Aaron]

Just looking at dividend history for Contact Energy on the NZX but the NZX site only has two years unless you want to pay $4,695 per annum.

Dividendyield.co.nz (thanks Birmanboy)and Contacts website both have the cash dividend paid but not the imputation credits attached. Same with the IRG yearbook.

Is there anywhere I can find the gross dividend including imputation credits attached as Contact does not always attach them at 28%.

Would there be a section in the company annual report that would cover this without me having to read all 90 odd pages to find the info?

I want the gross dividend information as using the cash paid would be like getting an interest rate based on net interest paid without know at what rate tax was deducted. Or have I got that wrong?

I do have the history of cash payments so maybe someone has an idea how I could use that, such as assuming fully imputed dividends (but risk over estimating).

[Aaron]

I will take it that the lack of replies means there is no historical data easily available that anyone knows about.

[peat]

I will take it that the lack of replies means there is no historical data easily available that anyone knows about.

I couldn't see any available in the eg 2013 annual or interim reports.

[Snoopy]

Just looking at dividend history for Contact Energy on the NZX but the NZX site only has two years unless you want to pay $4,695 per annum.

Dividendyield.co.nz (thanks Birmanboy)and Contacts website both have the cash dividend paid but not the imputation credits attached. Same with the IRG yearbook.

Is there anywhere I can find the gross dividend including imputation credits attached as Contact does not always attach them at 28%.

Aaron, I have done a bit of work myself on Contact dividends in the past. It is no longer quite up to date but you may find some of my historic posts on the CEN thread gives you a start. I have been a Contact Energy shareholder since day 1. So I was able to calculate the rate of imputation from my own dividend statements.

Post 1590 titled 'The overoptimisation of imputation credits' is here.

https://www.sharetrader.co.nz/showth...end#post757386

That post shows the somewhat patchy imputation record since the FY2015 50c 'special dividend'. That special dividend cleared out imputation credits before Origin Energy departed from the share register. IIRC the interim and final dividends were all fully imputed before this.

There is a problem with using historical dividends to value Contact Energy though. In FY2018 Contact changed their dividend policy to pay out 100% of 'Operating Free Cashflow', up from 80% of 'Operating Free Cashflow'. That means that the historical dividend payout is not representative of what would have happened had the FY2018 onward dividend policy been in place. I did the exercise and worked out what the dividend would have been over the previous ten years, had the current dividend policy been in place. This work is from the same page, my post 1579 titled. "FY2018 Dividend Policy: Scenario Analysis (2018 Perspective)".

Would there be a section in the company annual report that would cover this without me having to read all 90 odd pages to find the info?

There is a section on the dividend in each annual report. However, I am not sure it lists the detailed imputation credit details that you asked about.

I want the gross dividend information as using the cash paid would be like getting an interest rate based on net interest paid without know at what rate tax was deducted. Or have I got that wrong?

No, I think you have it right!

I do have the history of cash payments so maybe someone has an idea how I could use that, such as assuming fully imputed dividends (but risk over estimating).

No need to do that. That first post I referenced should give you the imputation credit information that you require, up until EOFY2018 at least! HTH.

SNOOPY

[Aaron]

Many Thanks Snoopy. Also 100% dividend policy will make a big difference to my calculations that I was not aware of. I see you used 6% for your Contact valuation back in May. Still 6%?

I really need to put in the hard yards like you do to get a better understanding of things.

I thought if I start with something simple like the dividend discount model as a starting point to get a potential buy price, I can work backwards on the assumptions such as the dividend and likelihood of future dividends. The capitalisation rate is a stab in the dark and adding a growth rate to try and make the share seem affordable is also a stab in the dark. Looking at the cash dividend history back to 2003 I was going to say there was little growth but I suppose there has been but it has been up and down.
Current share price looks fair at around $6 with a discount rate of 7% and using an average of dividends paid over the last four years. The increased payout ratio would have helped.

I put a bid in at $5 when it started heading back up after the crash but was too slow and didn't chase it.

My gut and historical precedent says we are in for another leg down when the economic impact of the world wide lockdown comes through in earnings and other figures but the optimist in me says word of a vaccine and the end of the lockdown with central bank lunacy supporting asset prices it will mean we are back to the races.

As Peat has said I can't wait for the bell at the bottom so I should at least make some effort towards basing decisions on something other than hope and luck and making some purchases now if they make sense.