8.13
Application IBM Step 4:
Estimating Normal Growth
We
will use 4.5% for the stage 2 normal growth estimate as a
conservative long term average growth rate for IBM.
This number can be justified from long term macroeconomic
data for the US economy
(See chapter 4 or chapter 5):
The one plus
the long term nominal growth in the US is around
1.018*1.03 = 1.04854.
As a result, to
be conservative we will round down and use as an upper bound for
economy wide growth for US stocks to be 4.5%.
Current Summary of Key Inputs for IBM:
Book Value
per Share
= Total Shareholders’ Equity/(Shares
issued – Treasury Stock) = 22.637/1.341 = $16.881 equals the
book value per share.
Dividend per Share
=
Dividends/(Shares issued – Treasury Stock) = 2,860/1341 = $2.132
equals the dividend per share.
Dividend Payout
Ratio
(Relative to Comprehensive Earnings) = 2860/10115 = 0.283
Comprehensive
Earnings per share
2009 = $10,115/1341 = $7.543
Comprehensive EPS
FY 2010
$7.543*1.1255 = $8.49
Comprehensive EPS
FY 2011
$8.49*1.094 = $9.288
5-Year Growth
= 0.1043
Normal Growth
= 0.045
Projected
Dividend per Share (Next Year) =
$8.49*0.283 = $2.403
Years in Stage 1
Growth:
5-years
We next turn
our attention to the discount rate – that is assessing IBM’s Cost of
Equity Capital.