Expected Initial Growth (4 years)
- Assume 7% average annual dividend growth for the first 4 years
- PEP had average 6.75% annual dividend growth over last 10 years (from $1.65 to $3.17)
- PEP had average 13.85% annual dividend growth over last 3 years (from $2.76 to $3.17)
Expected Terminal Growth
- Assume 5% average annual dividend growth after the first 4 years
- PEP had average 9.51% annual dividend growth over last 20 years (from $0.515 to $3.17)
- PEP had average 8.32% annual dividend growth over last 10 years (from $1.425 to $3.17)
Required Rate of Return (assume to equal Discount Rate)
- Am looking for a 12% average annual returns (over 10 years) on my investments
- Assume 4% PEP stock price growth over next 10 years
- PEP had average 4.38% annual stock price growth over last 10 years (from $71 to $109)
- Relatively conservative considering that average stock price rose by 7.84% per annum over last 50years
- This means I need an 8% annual dividend growth (12%-4%=8%) on the investment
Verdict
- Current Stock Price: $109.92 (17/04/2018)
- Valuation based on model: $111.368
- UNDERVALUED
Sensitivity Analysis
- 1% fall in Expected Initial Growth (4yrs) results in 3.53% fall in valuation
- 1% fall in Expected Terminal Growth results in 22.85% fall in valuation
- 1% fall in Discount Rate results in 51.05% rise in valuation
- Highly sensitive to changes in Discount Rate
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