Question

• Research and find at least two opposing views on stock dividend valuation models and present your own opinions on which you might prefer and why. please show sources

Answer 1

There are Two contradictory views in respect of dividend discount model in relation to find the stock valuation.

One group who supports the technique of valuing a share based upon its future dividend and another group contradicts the idea of valuation of a share based upon its dividend because they advocate that stock is not worth its dividend only , it has a whole lot of other payment associated with it also.

Those who supports dividend discounting technique advocates that sum of future value of dividend can be taken for calculation of the present value of a company. It believes that a company value is nothing but a sum of its future dividend.It takes into account, growth rate which are associated with the dividend and it also takes into account the expected rate of return by the shareholder and If we adjust the dividend payments with the difference in expected return and growth rate of dividend to find out the actual value of price as of today.this type of evaluation is a limited approach of valuation of a share price because only such companies can be valued regarding this model which constantly pays out dividend and who have a constant rate of growth attached with the dividend. if there are fluctuations regarding the Dividend policy, this model is not appropriate, or if the company is not opting on paying out the dividend ,model is not apt for them .

Those who contradicts this theory advocates that a company is not worth the the future value of its dividend accumulated together because a company has a large number of cash outflows and it should be based upon free cash flows rather than based upon the dividend payments because any company can obtain higher valuation regarding this technique if it is opting for payment of dividend as it does not consider the capital structure or the cost of distress associated with the company or the future survival rate or or any other factor except dividend payments. This group advocates that dividend discount model is a highly narrow approach of valuation of such companies which are mature in nature and they do not have the growth capability so they opt for paying out the dividend and gain high valuation.This also supports that those companies who have a higher growth rate will never payout dividend and in fact they will re invest their profit back into the business.