The Use of Dividends in Valuation: The Case of a Global Company

International Research Journal of Applied Finance ISSN 2229 – 6891

Vol. VII  Issue – V  May, 2016        Case Study Series

The Use of Dividends in Valuation: The Case of a Global Company

Halil D. Kaya*

Abstract

During the July 2015-Jan 2016 period, Apple Inc.’s shares had dropped by roughly 30% (60% in annualized terms). More recently, Apple’s shares are on a bumpy track: it first went up from its January lows, and then, once again, it came down. This case focuses on Apple stock’s price fluctuations and it attempts to estimate the fair value of the company’s shares. It uses the dividend discount model of valuation. Students will first learn about the advantages and the disadvantages of this valuation method. Then, under different scenarios, they will use the dividend discount model to make an investment decision. Under each of these scenarios, they will first estimate the company’s share value, and then compare it to the market value of the stock and then make an investment decision: Buy, hold, or sell. Apple’s financial statements are provided in the case for students’ use.

Keywords: financial statement analysis, valuation, dividend discount model, Apple JEL classifications: L25, G11, G12, G15, F23

Introduction

It was Monday morning, and at Global Growth Investments, a group of analysts was working on a task: the valuation of Apple Inc.’s shares. During the July 2015-Jan 2016 period, the company’s shares went down significantly. Mr. Jacobs, the chief analyst at Global Growth, asked the junior analysts to examine what was happening with Apple’s shares. John Hancock and his colleagues want to start analyzing the company this week.

John, a recent graduate of a respected MBA program in the West coast, was chosen to lead the team. His objective is to present their finding next week at the weekly departmental meeting.

“Let’s start working on this” he exclaimed. “Carol, have you looked at the company’s financials? Do we have the statements ready?”

Carol, who has been working in the same department as John for the last six months, is glad that they will be working on this. “Yes, they are ready. They are on the table waiting for us (Exhibits 1 and 2). We can start working on this now. I think there is a lot of money to be made in this environment. The stock is going up and down like crazy”.

Adam joined the conversation: “I think we can start looking at the company’s dividends. Maybe we can focus on the dividends first. Then, we can look at the earnings, cash flows, competition, and other stuff”.

“O.K. then. That’s the plan” John responds. “Carol, how much was the drop in the stock over the last few months?”

Carol reached for a file sitting in the middle of the table. “On July 20, 2015, the stock was at $132.07. Less than six months later, on January 27, 2016, it was $93.42” Carol responded.