How to Value a Stock Using the Dividend Discount Model
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- Опубликовано: 6 авг 2024
- Ryan O'Connell, CFA, FRM explains how to value a stock using the dividend discount model (DDM) in Excel.
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Chapters:
0:00 - Download Stock Dividend Data from Yahoo Finance
0:32 - Calculate Dividend Growth Rate
1:41 - Calculate Stock Price Using Dividend Discount Model
2:34 - Is the Stock Overvalued or Undervalued?
2:58 - Calculating Required Return Using Excel Solver
Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.
🎓 Tutor With Me: 1-On-1 Video Call Sessions Available
► Join me for personalized finance tutoring tailored to your goals: ryanoconnellfinance.com/finance-tutoring/
💾 Download Free Excel File:
► Grab the file from this video here: ryanoconnellfinance.com/product/stock-valuation-excel-spreadsheet-using-dividend-discount-model/
I can't seem to get enough of your content! I've been going back and forth between lots of them for the past 2-3 hours. Amazing work! I would like to see a video that goes over valuation of callable bonds. I know most of the math involved but I like the way you go about explaining and simplifying things as our professor shows us the formula but doesn't do much of the latter. Thank you.
I really appreciate all of your positive feedback and I will keep in mind your video idea for valuation of a callable bond in the future!
Ryan, I stumbled across your videos trying to understand WACC, and your content is excellent. I learn a lot more watching your videos compared to sitting in a lecture hall for more than 3 hours a week.
I'm glad to hear that! I had the same experience when I was in school. There is so much better free stuff on RUclips than the expensive courses we take at universities
@@RyanOConnellCFA
You're speaking the truth right there Ryan. I am seriously debating whether to continue attending lectures or rather just focus on watching videos made you and other content creators, it's a better use of my time.
thanks for helping me with my assignment, this helped a lot
Thank you Ryan! Your videos very helpful
My pleasure!
Excellent video! Super important model when valuing banks!
Thank you! I've been loving some of your recent shorts
Out of all the videos I have watched on RUclips, yours was the only one that made sense.
Really appreciate that Linda! Glad it helped
Thank you for video and excell
Keep up the good work! Can’t thank you enough as a soon to be finance graduate student
Happy to help! Good luck with grad school Joshua
Thank you for this. It is one of the best I have found
Really glad to hear that it helped you out!
Thank you for sharing.
My pleasure!
hi Ryan, I'm curious what if the required return < growth? thank u in advance
Extremely helpful video. One question, how do you get a quarterly dividend? You add how much dividend is paid quarterly?
Thank you! Yes, in this video I just took how much each single share paid out as a dividend each quarter
great video, thanks!
You're welcome!
Could you make some videos about valuation methods and explain when we have to use the appropriate method according to the company being valuated? i mean pros and cons etc. Amazing job btw, love your work
Great suggestion, I'll look into this in the future!
Can you explain required return a little more? From my understanding this is the return that I would require if I was holding this stock, so I input whatever value I perceive that as. Is this correct? Are there any “standard” values that you would enter while using this model to keep everything uniform and on the same basis?
Hi Ryan,
thanks for providing this great content!
In this model, the required rate of return includes the risk-free rate, right?
Or does r already indicate the risk premium that investors expect from Intel?
Its my pleasure! The discount rate will include the risk free rate plus a risk premium on top for the additional risk of investing in a more risky asset
Another great video Ryan. Thank you. One question; In Required Return, can I use the WACC percent?. For example, I did it with apple and its WACC is 9.85%.
Thanks William! I believe you could use the WACC figure as the required return to perform some type of valuation
Hi Ryan, thanks for such a great tutorial! Can we still use this model if our required return is larger than the average growth rate?
Hello, yes required rate of return should be higher than the growth rate in this model.
For this model to work and avoid a mathematical error or illogical results, the required rate of return (r) must indeed be greater than the growth rate (g) of dividends. If g were equal to or greater than r, the denominator would be zero or negative, which doesn't make sense in this context. In practice, investors require a return greater than the growth rate to compensate them for the risk taken.
Hey, Ryan!
I want to start modelling for practice and later on the road of CFA apply for another position ... do you recommend any course (BIWS vs WSP vs TTS vs CFI) ? Great video btw
Thank you Denis. And I'm not sure about any modeling courses as I learned modeling on the job. I have heard good things about the modeling courses provided by WallStreetPrep however
Hi Ryan, thank you for the video - I have been avidly consuming your content the past couple of hours. Your tutorials are great in learning how to practically apply theoretical knowledge. This question may be off-topic, but would you be able to shed light on the usefulness of the Corporate Finance Institutes' FMVA and BIDA certifications to someone pursuing the CFA charter? Thanks so much!
Really great to hear you are getting some value out of the videos Vik! I'm sorry but I have no experience with either of those certifications so I can't offer any useful insight into them
@@RyanOConnellCFA thanks nonetheless for the response. Enjoying the tutorials!
@@vik914 Thank you and best of luck!
I just wanna ask, what if there 2 years with no dividend, what will happen to the calculation?
For those years you can just put a dividend of 0! The growth rate will be negative the first year and 0 for the next year. To avoid a divide by 0 error the second year, I would wrap the formula to determine growth rate in an if() function that says if the divisor is 0, then give me 0%
Ig for companies who don't pay regular dividends, we can't use DDM to calculate the price.
how if average growth rate is larger than required return? ddm is minus
Can you respond me a doubt?. What if the Average Growth rate is 7.15% and the discount rate (r) is 3 %. The result is negative. What does that mean? Example: 6'23/(3,00-7'15)= -150,11. Than you
What do you do if the avg. growth is greater than the required return? It results in a negative value.
If the average growth rate exceeds the required return, it typically indicates an unrealistic scenario or a misapplication of the model, as it suggests an unsustainable growth. In such cases, you need to re-evaluate your inputs or consider using a different valuation model more suited to the company's financial profile. It is possible that the company you are looking at went through a period of unsustainable growth in your sample
Taking average growth rate or growth rate using r*(1- Payout ratio)
Which one will be appropriate?
And what's the difference between both?
Using the average growth rate of dividends for the dividend discount model is more straightforward and is based on historical data, providing a simple estimate of future growth. In contrast, calculating the growth rate using the gordon growth model and the formula Return on Equity × (1−Payout Ratio) can offer a more nuanced view, as it ties the growth rate to the company's reinvestment strategy and profitability. The key difference is that the average growth rate method relies on past trends, while the latter approach considers the company's potential to generate future earnings and reinvest them effectively.
Hello ryan, thank you for video, it is excellent. I have an interview on monday for business analyst job. Can you tell me what kind of analysis I should know for this job. Please don't forget the answer this time 😀 thanks in advance
Haha sorry for the delay again Selim! What type of business analyst job is it? And what type of company is it for? I believe business analysts need to be good at performing analysis on raw data and turning it into meaningful insights that they can present well usually in powerpoints. At least from my experience. So maybe you could try finding a business analyst case study on the internet and work it out for practice. But this isnt my world so I'm not certain
@@RyanOConnellCFA The role description is very general, i don't know what to study. It is Consultancy company. Thanks 😀
@@RyanOConnellCFA by the way, i have been waiting for you. Here, it is midnight, now I can sleep.😂
Why should we find the growth rate up to 2015??
Hey, great video but I have a doubt Suppose for a whole year dividends are different so what to do? For example company Reach Plc 2022- 3 different dividends
Thank you! You could do a similar analysis to what I did here, except that you would need to calculate annual dividend differently. Instead of just multiplying the quarterly dividend by 4, you would need to find the sum of each dividend each year . So for example, if their dividends were 0.22, 0.5 and 0.1 for 2022, their annual dividend for that year would be 0.22 + 0.5 + 0.1 = 0.82
@@RyanOConnellCFA so if their dividend would be 0.22,0.5 and 0.1 I would sum up the dividend but do i have to multiply it for annual dividend?
@@mehulgoel8562 No, in this case, all you would need to do is sum. You are just trying to find the total amount of dividends paid that year
Thank you for your valuable insight Ryan! Great video and so clearly explained
Why not geometric average
Hey Ryan, is this multi stage or single stage model? Thanks
Hello, it should be a single stage model as we are just assuming a constant growth rate the whole time
Hello Ryan, don't forget me this time :)
Then, what about business analyst job 😅
speedrun
You know it!