In: Finance
Use the following information on Disney to answer the case questions.
◼ Disney’s current stock price is $140.00 per share. The average growth rate of the company’s dividend has been 17.7% from 2004 through 2018
◼ Disney’s return on equity is 28.0% and the company retains approximately 80.0% of its profits while paying out the remaining 20.0% in dividends.
◼ The company’s stock currently trades at 21.21 times its current year earnings estimate of $6.60 per share.
◼ Analysts expect the company to earn $6.19 per share in 2020 and $6.93 in 2021. ◼ Disney’s peers in media networks trade at 25.5 times their current year earnings estimates while peers in parks, experiences and consumer products at 21.9; studio entertainment at 19.1 and DTCI at 14.1.
◼ Assume the expected return for Disney’s stock is 6.9%.
What is Disney stock’s intrinsic value using Multi-Stage Growth Model
Current Stock Price | $140 | ||
Average growth rate from 2014 to 2018 | 17.70% | ||
RoE | 28% | ||
Retention ratio | 80% | ||
Dividend payout ratio | 20% | ||
Current PE | 21.21 | ||
Estimate EPS for current year (2019) | $6.60 | ||
Estimated Dividend per share for 2019 | $1.32 | ||
Expected EPS for 2020 | $6.19 | ||
Expected EPS for 2021 | $6.93 | ||
Expected return on equity | 6.90% | ||
Table | 2019 | 2020 | 2021 |
Earnings per share | 6.6 | 6.19 | 6.93 |
Dividend per shre | 1.32 | 1.238 | 1.386 |
Discounted value of dividend to present value | 1.23 | 1.08 | 1.13 |
Dividend payout ratio | 20% | 20% | 20% |
Retention ratio | 80% | 80% | 80% |
Post 2021 Company is expected to grow at stable growth rate with 80% as retention ratio | |||
Stable growth rate is defined as product of retention ratio and expected return on equity | 5.5200% | ||
Terminal value of dividend | 105.98 | ||
Present value of terminal value | 86.75 | ||
According to the model the stock price is sum of all discounted value of dividends and terminal value | 90.21 | ||
Stock is overpriced |