Thursday, October 11, 2018

Valuing a Dividend Growth Stock with the Magic Formula (Dividend Growth Whisperer)

Enter the parameters below, then click "Calculate!" to calculate the estimated return for a dividend growth stock with those parameters.


  • This calculation is based on the magic formula detailed in my recently published book, Dividend Growth Whisperer. The magic formula, with a couple of heuristics, provides a complete, reasonable valuation methodology to value dividend growth stocks (and really all stable stocks, as well).
  • KEYBOARD INTERFACE SHORTCUTS (WINDOWS): Use the TAB, SHIFT+TAB, and ENTER keys to navigate the interface. TAB moves you forward from the first box to the second box and so on. SHIFT+TAB (that is, pressing the SHIFT key and TAB key simultaneously) moves you backward. Pressing the ENTER key while the focus is on the Calculate! button calculates the estimated return.
  • Payout ratio is not the dividend payout ratio. Instead, it includes dividends, (net) share buybacks (that is, cash spent on share buybacks minus cash collected from shares issued), and any cash that the company can return to shareholders but for whatever reason does not, allowing for the company to retain some for adverse times. Obviously, this is estimated and requires a good understanding of the company's business.
  • (Average) earnings growth rate is the average earnings growth rate (not the average earnings per share growth rate!) over the next 30 years, the earnings pattern similar to the pattern of earnings stipulated in the model in my book, Investing in Dividend Growth Stocks. Per the book, implicitly, therefore, I assume any stated average earnings growth rate incorporates earnings growth rates of R percent a year for 10 years, S percent a year for the next 10 years, and T percent a year for the last 10 years (of the 30), where R >= S >= T. Earnings growth after 30 years is assumed to be 3 percent a year, continuing for 170 years (!), essentially, then, until the present value of the values at those later years hits, effectively, zero.
  • Earnings growth rate is roughly earnings per share growth rate minus the net share buyback rate. So if a company has an earnings per share growth rate of 8 percent a year and buys back its shares, net, at 2 percent a year, its earnings growth rate is 6 percent a year.
  • Moderate growth here signifies the moderate earnings per share growth typical of dividend growth stocks as defined in my books, so 8-12 percent a year for large-caps and 8-16 percent a year for midcaps. Here, somewhat arbitrarily, the valid ranges are set from 3 percent to 16 percent.
  • Current P/E ratio, ideally, reflects average earnings 6 months in the past and 6 months in the future. Roughly, it is the current price divided by the sum of eps for the last 2 quarters and the next 2 quarters.

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