Question: The Gordon Growth Model asserts that the
value of a stock can be modeled as
P = D/(kg)
Where D is the expected price on a stock.
D is next year’s expected annual dividend per share
k is the investor’s discount rate
g is the expected growth in dividends.
Use the Gordon Growth Model to compare the viability of the
current stock prices for Apple and Microsoft.
Here is a discussion of the Gordon Growth Model:
Here is my assessment of Microsoft and Apple. (I am using current market prices for P and
current dividends for expected next year’s dividends and a 0.12 discount rate for
investors in both companies.
Input for Gordon Dividend
Growth Model Calculation


Apple

Microsoft


Price of Shares

$97

$43

Expected Dividends Per
Share

$1.88

$1.24

Discount Rate

0.12

0.12

Given these admittedly arbitrary assumptions, what is the
value of g (the expected growth in dividends) that is consistent with current
market prices for the two stocks?
Answer:
Rearrange the Gordon Growth Model equation to solve for g.
g= (PkD)/P
Below is the calculation for g and the check for the
calculation.
Calculation for g and
check of calculation


Apple

Microsoft


P

Price of Shares

$97

$43

D

Expected Dividends Per
Share

$1.88

$1.24

k

Discount Rate

0.12

0.12

(PkD)/P

g

0.101

0.091

D/(kg)

Check

$97

$43

Observations:
Based on the Gordon growth model and my assumptions I
calculate the dividend growth rate consistent with current stock price.
The model finds g=0.101 for Apple and g=0.091 for Microsoft.
What projection of future dividend growth is more realistic?
The answer I believe is that at this point in time Apple is
much better positioned than Microsoft.
Why:
The current dividend yields for Microsoft and Apple are 2.9%
and 1.9& respectively. Based on
these yields Apple has more upside on dividends.
Microsoft is already paying more of its income on dividends
than Apple – payout ratios are 41% for Microsoft and 29% for Apple.
Why I could be
wrong on this:
Microsoft has more cash per share than apple $10.31 for
Microsoft and $6.33 for Apple.
Financial Statistics are from Yahoo:
Other interesting
posts on Apple and Microsoft:
Yesterday I looked at wealth accumulated by an investor who
bought 100 shares in the Microsoft and Apple IPO.
Interestingly, the Microsoft beat the Apple IP by a
lot. The Windows franchise was
incredibly dominant for a long time and the finance people at Microsoft were
very good at making sure previous investors were not diluted down.
However, Apple got hot with new products – ipod, ipad,
iphone, and now even icash. The struggle
continues.
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