Chapter 6 Set 4

The Procter & Gamble Company

Analysis
An Analysis of the
Procter and Gamble Company
The next few slides contain a financial analysis
of Procter & Gamble, using data from the Value
Line Investment Survey.
Please note that this example is not identical to
the example shown in the textbook. Figure 6.2
in the textbook showed a financial report from
Value Line dated 2012. A more updated
financial report is used here. The report is
dated Dec. 23, 2016.
Before move to next slide, download a copy of
the financial data of PG (PDF file posted on
Blackboard). We will refer data values from the
 An Analysis of the
Procter and Gamble Company
The Procter & Gamble Company Analysis

P/E ratio=

= 22.1

Relative P/E ratio = = 1.11


Dividend Yield = =
=3.1%

=
3.35%
Using the Dividend Discount Model

Step 1: Find the discount rate:

As the textbook suggested (page 205) when apply the CAPM model, we
will use a normalized Treasury bill rate of 4% and a historical stock
market risk premium of 7% to find PGs discount rate.

Examine the Procter & Gambles financial report, find the beta value
and then apply all values to the CAPM to estimate the discount rate for
PG.

Work on that and then move to next slide for answers.

Using the Dividend Discount Model

Step 1: Find the discount rate:

As the textbook suggested (page 205) when apply the CAPM model, we
will use a normalized Treasury bill rate of 4% and a historical stock
market risk premium of 7% to find PGs discount rate.

Examine the Procter & Gambles financial report, find the beta value and
then apply all values to the CAPM to estimate the discount rate for PG.

The answer:

Based on the CAPM, k = 4.0% + (0.7 7%) = 8.9%

Using the Dividend Discount Model
Step 2: Find the sustainable growth rate, g

Now, examine the PGs report and fine EPS2016 and D2016.

Then calculate Retention Ratio2016

Also fine the ROE2016

Next, calculate the sustainable growth rate.

Using the Dividend Discount Model
Step 2: Find the sustainable growth rate, g

EPS2016 = 3.67
D2016 = 2.66
Retention Ratio2016 = 1 (2.66/3.67) = 0.28 = 28%
ROE2016 = 18%

Thus, the sustainable growth rate:

g = .18 * .28 = 0.0504 = 5.04 %
Using the Dividend Discount Model
Step 3. Estimate Per Share Price for 2017

Project Price2017 at Beginning of the year and assume

that D2017 has not been paid yet
Project Price2017 = D2017 / (k g )
where D2017 = D2016 * (1+g)

Project Price2017 sometimes during or close to the end

of the year and assume that D2017 has been paid then
the first unpaid dividend will be D2018
Project Price2017 = D2018 / (k g)
where D2018 = D2017 * (1+g) = D2016 * (1+g)2
Using the Dividend Discount Model
Step 3. Estimate Per Share Price for 2017

Project Price2017 at Beginning of the year and assume that D2017

has not been paid yet
Project Price2017 = D2017 / (k g ) = 2.794 / (.089 - .0504) =
$72.38
where D2017 = D2016 * (1+g) = = 2.66 * (1+0.0504) = 2.794

Project Price2017 sometimes during or close to the end of the

year and assume that D2017 has been paid then the first unpaid
dividend will be D2018
Project Price2017 = D2018 / (k g) = 2.935 / (.089 - .0504) = $76
where D2018 = D2017 * (1+g) = D2016 * (1+g)2 = 2.66 *
(1+0.0504)2 = 2.935
 Using Residual Income Model (RIM)

Major Assumption (known as the Clean

Surplus Relationship, or CSR): The change
in book value per share is equal to earnings
per share minus dividends.

B = EPS Div Div = EPS - B

Using Residual Income Model
Inputs needed:
Earnings per share at time 0, EPS 0
Book value per share at time 0, B 0
Earnings growth rate, g
Discount rate, k

There are two equivalent formulas for the Residual Income

Model:
EPS 0 (1 g) B 0 k
P0 B 0
kg

or

EPS1 B 0 g
P0
kg
 How to get the dividend growth rate
201
2 2013 2014 2015 2016
Dividend per share 2.14 2.29 2.45 2.59 2.66
Dividend growth
rate 0.0701 0.0699 0.0571 0.0270

The arithmetic
average = 0.056 =
5.6% (adding all 4
growth rates then
dividend
Geometric average dividend growth by(D
rate = 4)2016 /
D2012)1/4 - 1
= (2.66 / 2.14).25 - 1 = 0.05589 or 2.14 * (1+geo)4 =
Using the Residual Income Model
Lets assume that today is January 1, 2017, g =5.59%, and k
= 8.9%.
Using Residual Income Model

Since we know that there are two equivalent

formulas for the Residual Income Model:
EPS 0 (1 g) B 0 k
P0 B 0
kg

or

EPS1 B 0 g
P0
kg

Stock price at the time, about $85.18.

What can we say?
We can also use column one and our growth assumption
(g=5.59%) for column three (CSR) of the table.
Residual Income Models Major Assumption (known as the
Clean Surplus Relationship, or CSR): The change in book
value per share is equal to earnings per share minus dividends.
B = EPS Div Div = EPS B = $3.875 (22.53 21.34) =
$2.685

End of 2016 2017 (CSR)

Beginning BV per share N/A $21.34

EPS $3.67 $3.67*(1+.0559)= $3.875

DIV $2.66 $2.685

Ending BV per share $21.34 $21.34*(1+.0559)= $22.53

 When Dividend is estimated, Apply it to
Dividend Discount Model

End of 2016 2017 (CSR)

Beginning BV per share N/A $21.34

EPS $3.67 $3.875

DIV $2.66 $2.685

Ending BV per share $21.34 $22.53

Using Price Ratio Analysis

Data is from
the Value
Line:
Procter &
Gamble
Report
 Using Price Ratio Analysis: EPS

Average P/E =19.59

Average Earnings growth rate = -1.01%
Est. Price = 3.67 * (1+(-0.0101))*19.59 = $71.17
 Using Price Ratio Analysis: CFPS

Average P/CF = 14.70

Average CF growth rate = -1.02%
Est. Price = 4.97 * (1+(-0.0102))*14.70 = $72.32
 Using Price Ratio Analysis: SPS

Average P/S =2.71

Average Sales growth rate = -5.15%
Est. Price = 24.47 * (1+(-0. 0515))*2.71 = $62.90
 Using Price Ratio Analysis
Dec. 23, 2016 and Market Price =$85.18
Earnings Cash Flow Sales

Five-year
average price
19.59 14.70 2.71
ratio
Current value
per share
$3.67 $4.97 $24.47
(2016)
Five-year
average
-1.01% -1.02% -5.15%
Growth rate
Expected
share price
$71.17 $72.32 $62.90
 Conclusion
DDM, with calculated sustainable growth rate (5.04%): $72.38 (slide #12)
RIM, historical growth rate (5.59%): $81.03 (slide #17)
RIM, historical growth rate (5.59%)
and CSR assumption to get the DIV = $2.685
then, apply it to DDM equation $81.12 (slide #19)
Price-earnings model: $71.17 (slide #21)
Price-cash flow model: $72.32 (slide #22)
Price-sales model: $62.90 (slide #23)

Dec. 23, 2016 Report, stock price =$85.18

The job is not to find a model that gives you

the closest amount to the current stock price.
The goal is to find a model that you are most
confident.
The Procter & Gamble Company Analysis
When Dividend is known or estimated, Apply
it to Dividend Discount Model
Now, let us use the forecast values from
Value Line to estimate stock price. Fill in the
third column labeled 2017(VL) from the PGs
value line financial report.

End of 2016 2017 (VL) 2017 (CSR)

Beginning BV per share N/A $21.34 $21.34

EPS $3.67 $3.85 $3.875
DIV $2.66 $2.85 $2.685
Ending BV per share $21.34 $23 $22.53
 Apply to Dividend Discount Model when
Dividend is known or estimated

Using the CSR

assumption:

Using Value Line

numbers:

Dec. 23, 2016 Report, stock price =$85.18

Jan. 17, 2017 actual stock price is $85.21
Useful Internet Sites
www.nyssa.org (The New York Society of Security Analysts)
www.aaii.com (The American Association of Individual Investors)
www.cfainstitute.org (the web site of the CFA Institute)
www.valueline.com (the home of the Value Line Investment Survey)
jmdinvestments.blogspot.com (reference for recent financial news)

Websites for some companies analyzed in this chapter:

www.aep.com
www.dteenergy.com
www.americanexpress.com
www.pepsico.com
www.sbux.com
www.gm.com
www.intel.com
www.disney.go.com
www.pg.com