11 Comments

Great post. I use a Dividend Discount model based on Return of Equity, Net asset value, Pay out ratio and discount of 7%.

After the 8th year I assume that the payout ratio is 100%. This method because its based on real figures that the company has achieved the result has been pretty reliable.

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Do you not think that a 100% payout ratio assumption is overly positive? I imagine that it won't matter too much since stock prices tend to track earnings, but there's something about that assumption that bugs me a little.

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I apologise for not being clearer. The whole calculation depends on the retained earnings added back to the net asset value for the calculation to repeat for the next year.

I assume the 100% payout ratio just to prevent the the retained earnings to stop the number getting silly.

The intrinsic value is based upon the sum of each years discounted distributed dividends.

If you would like I can forward a copy of my spreadsheet, perhaps for the benefit of other readers.

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I'd love to take a look!

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How do I upload an excel file. Other than drag and drop or Copy and Paste I can't figure out how. My e-mail is acik24@hotmail.com

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Hi Louis,

You should be able to upload it to google drive, and then make it public with a link. Then just post the link here!

Best regards,

Tiago

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Thank you Tiago.

It looks a bit ugly when not in an Apple Numbers format and to that end I'm not to good at rearranging other spreadsheets.

https://docs.google.com/spreadsheets/d/1SPfma9RZZmzCAHs-SwfAy8ivRWAs30bB/edit?usp=sharing&ouid=104440145102004651918&rtpof=true&sd=true

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Hi Tiago, I recently subscribed to your blog after listening to you on Dividend Talk (great episode btw!) and I am glad I did. This is a great post. I agree with your assessment about DCF models. I have come to the realization that it is better to use DCF as simply one of the tools in my toolbox and tweak it to match my investment goals/outlook for simplicity. There are several cases where using DCF is simply not practical. Indeed, Prof. Damodaran himself has admitted this (written about his comments in book review of "The Little Book of Valuation" https://lifewithdividends.wordpress.com/2022/03/01/the-little-book-of-valuation-book-review/). I think I have settled on doing a combination of several different models (DCF, DDM, P/TBV etc.) to value a business and then use an adequate margin of safety to safeguard against my own stupidity. More importantly, as far as valuation, I have mentally tuned myself to operate in ranges and not a specific number as the later could lead to anchoring bias.

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Glad you like it!

I definitely agree that working in ranges, or explicitly uncertain values is significantly better than getting a single all-encompassing number. Too much precision like what we get in DCFs gives a false sense of security, and helps you forget that all of those underlying assumptions might not be as strong or as true as assumed.

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Spot on! And what about getting info on customer satisfaction reviews to get a better idea how the company is doing?

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Customer reviews can help you understand how the company is seen by its customers (or how good it is at SEO!) but I wouldn't expect it to be a good benchmark as to how the company is doing.

Any company can get good reviews simply by spending a ton of money on COGS and customer support. In many ways consistently terrible reviews are a better indicator of company quality and their moat, because if their customers hate them, but they keep buying, then clearly they are providing something irreplaceable.

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