Instructions
The company I am using is American Express Company AXP.
In the Section 3: Dividend Analysis and Preliminary Valuation assignment, you will compute the of the company’s stock value based on historical dividend data for your company and a market-based equity rate of return. In this analysis, you will use the constant growth formula to compute an estimate of the stock price.
Once you have calculated the stock value, you will compare the company’s calculated value to the current market price of the stock. This comparison will help you determine if the stock is currently under-valued or over-valued, and will help you determine your recommendation of buy, hold, or sell. Analysts prepare value estimates based on historical data for the company as well as an understanding of expected future equity rates of return. It is important to understand that the constant growth formula provides an estimate of value, and analysts, like all humans, can be both right and wrong. The inputs used in the formula will greatly impact the value conclusion.
Write:
In your paper, address the following five parts in a Word document:
Part 1: Dividend Analysis (two to three paragraphs):
Create a table that illustrates the annual dividends per share paid by your selected company over the past 8 years. If the company has not paid dividends for 8 years, include as many years as available.
Calculate the growth in annual dividends per share each year and include this annual growth rate in your table.
To find the dividends your company has paid in the past 8 years, review the BUS401 |Picking a Company that Pays DividendsLinks to an external site. video from Week 1.
Calculate the average dividend growth rate over the following periods:
the most recent 8 years,
the most recent 5 years, and
the most recent 3 years.
Summarize the trend in the dividend growth rates.
Have the dividend growth rates increased or decreased? By how much? Has the increase or decrease been steady or varied from year to year?
Determine your estimate of the future dividend growth rate for this company. You are to choose a growth rate based on what is reasonable from the data you have on the company’s dividend growth in prior years, as presented in your table. The estimated future dividend growth rate can be any of following:
the most recent year growth rate;
the average growth rate over the 8-year period;
the average growth rate over the most recent 5 years;
the average growth rate of the most recent 3 years; or
a growth rate you select that is reasonable, given the 8-year, 5-year, and 3-year averages, as well as the recent year growth rates.
NOTE: The estimated dividend growth rate must be lower than the required rate of return used in the constant growth formula. See Part 2 below for the required rate of return to use in the constant growth formula.
Justify your determined the dividend growth rate for your company. In your justification, provide a least two financial facts from your Week 1 and Week 2 assignments to support your determination.
Part 2: Preliminary Valuation: (two to three paragraphs)
Calculate the stock price for your selected company using the constant growth formula and the dividend growth rate you determined in Part 1. Show all calculations for this estimated stock price using the dividend growth rate.
For the required rate of return (r), use the following assumptions:
For a large capitalization company (greater than $10.0 billion in market capitalization) use 12.0%.
For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 15.0%.
For a small-cap company (less than $2.0 billion in market capitalization) use 18.0%.
Show your calculations.
Compare the stock price you just calculated to the current stock price per share of the company.
State whether the constant growth stock price is above or below the current price.
State whether the constant growth stock price indicates if the stock price is currently under-valued or over-valued in the market.
Determine your concluded stock value, based on the calculation using the constant growth formula. The concluded stock value can be either:
the calculated value using your dividend growth rate and the constant growth formula;
the current market value;
Justify your conclusion of value for your stock. Include least two financial facts from your Week 1 and Week 2 analyses.