Dividend Growth Model shows +35% potential upside in GE
- 4 Comment
As Mr. Market is battering down stocks day in and day out, you will hear that this is a great time to buy more stock. I am still cautious to participate in some broad based buying but there are some great names out there at a significant discount, such as General Electric (GE).
One stock valuation tool that I like to use in volatile times is the Dividend Discount Model (DDM), which basically provides a stock price estimate on the dividend paid by the firm discounted back to present value terms. If you are looking for some more information, here is the investopedia link on the Dividend Discount Model.
So to create the assumptions for the calculation of the DDM for GE, I start with the historical dividend payments from the company. You can see, GE has paid $0.31 in quarterly dividend totalling at $1.24 per year. The historical table also shows that GE has increased the dividend by 10% annually.
GE Assumptions for the DDM (very conservative):
Trailing Twelve Months Dividend Payments: $1.24
Dividend Annual Growth Rate: 0% until 2011, then 3.5%
Cost of Capital: 8%
Resulting in a stock price of: $25.84, this is a +35% increase from Friday’s closing price.
If you are interested, here is the excel worksheet with my calculations
In my opinion, this conservative application of the Dividend Discount Model to General Electric provides a 35% upside potential, taking advantage of Mr. Markets sour short-term mood. In an effort to follow this trade, I will add this stock to my paper trade portfolio. measuring the success of this stock against the S&P 500 benchmark.
Is there something that I am missing? please leave a comment to let me know…
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Author Disclosure: I am neither long nor short GE, this post was for entertainment purposes only.
4 Comments on this post
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Dividends Anonymous said:
I really like GE despite the dark shadows overhanging its finance division. The company still sells products and services in its other operations that are the premium choice for the industrialized world. If you can get a decent yield on a long-term investment than the short-term volatility is just psychological
November 10th, 2008 at 10:43 am -
Mark Van Heuvel said:
Okay, but you have to look at market conditions which are likely to get worse before they get better and also will they cut the dividend?
December 26th, 2008 at 1:42 pm -
Sensual photography said:
When calculating cost of equity which gives a better estimate the Capital Asset Pricing Model or Dividend Growth Model.
May 23rd, 2009 at 12:09 pm
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