This means that the value of the growth is $10.50 -$10.00 = 50 cents. In other words, approximately 5 % of the stock' s value comes from growth. (4)Example: Source: Value Line Investment Survey for the beta, earnings estimate, and price of each. Based on data from early August 2013, illustrates that the value of growth represented about 44 % of the market value of technology company Google and a much smaller percentage of McDonald's value and Macy's value. The low value for McDonald's PVGO reflect increased competition in the fast-food business, commodity cost pressures, and/or unfavorable foreign exchange; it could indicate that the company has a much higher payout ratio than Google or Macy's and, the earnings estimate was too high and/or the required return on equity estimate was too low. 2.P/E ratio and growth As an additional aid to an analyst, v0 can be restated in terms of the familiar P/E ratio based on forecasted earnings:
4 The first term, 1/r, is the value of the P/E for a no-growth company. The second term is the component of the P/E value that relates to growth opportunities. For Google, the P/E is $896.57/$35.8= 25.04. The no-growth P/E is 1/0.071 = 14.08 and is the multiple the company should sell at if it has no growth opportunities. The growth component of $ 392.34/$ 35.80= 10.95 reflects anticipated growth opportunities. The distinction between no-growth and growth values is of interest because the value of growth and the value of assets in place generally have different risk characteristics. 3.PVGO as a Risk Factor Imagine two stocks. Your models value both stocks at $20. But stock A has $20 of assets in place and no growth opportunity. Stock B has $12 of assets-in-place and $8 of value that is attributable to future growth. Then imagine that both companies miss their earnings estimates by 1 cent. How will the stocks react? The market is likely to ignore Company A's earnings miss. It doesn't matter (unless the market thinks that future earnings will be significantly impaired). Over the long term, we still expect the dividend to continue. In short, some analysts may view the no-growth model (based on a truly sustainable dividend) as something close to a price floor.Analysts may infer that Company B is less likely to meet growth expectations. In sum, the PVGO calculation is crucial in helping analysts understand the significance of growth in his valuation-and this may be thought of as a risk factor.
5 4.PVGO Can Be Negative Too often This is a really important point: Value is created by earning more on capital than the capital cost. Growth is valuable if the return on equity is higher than the cost of equity. Imagine that a company is going to earn $2 per share next year, and it should be able to pay out 25 % of those earnings in the form of a dividend. The company is expected to grow 4 % per year and has a cost of equity of 12 %. To calculate the present value of the growth opportunity: Growth =ROE * RR, so 4% =ROE * 75%. Therefore, ROE = 5.33%.
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Spring '17
CW
Financial Ratio, Dividend yield, P/E ratio, analyst, dividend payout ratio