Woolworths Ltd (WOW) Valuation Report
Executive Summary
This report provides a price analysis and valuation of the Australian Security Exchange (ASX) listed company, Woolworths Ltd (WOW). Historical data is utilised with the Retention Growth Model to estimate the expected perpetual semi-annual growth rate of the company’s dividends. The Capital Asset Pricing Model is used to estimate the required rate of return for this company and the current expected share price is calculated using the Constant Dividend Growth Model. All data can be found in the appendices.
The results of the analysis show that the WOW stock is undergoing rapid growth and is currently under-priced. The findings suggest that at present, Woolworths Ltd represents a great investment opportunity.
The report also discusses the limitations of the methods used, including predicting future returns from historical returns, the volatility of the risk premium and also changes in the market and firm.
The expected perpetual growth rate of dividends
The Retention Growth Model1 will be used to calculate the expected perpetual growth rate of WOW’s dividends. Using this model, the ratio of reinvested funds is multiplied by the firm’s return average on equity to calculate the estimated growth for the next period.
To utilise this model in assuming the calculated growth rate is constant and perpetual, several assumptions must hold. We must assume that the variables used to calculate the growth rate, namely the return on equity (ROE) and the payout ratio, are constant and sustainable.
With respect to the assumptions mentioned above, historical data of the past five years was used to obtain the average ROE and payout ratio to smooth out fluctuations.
However, WOW issues dividends semi-annually, so the dividend growth rate must be adjusted accordingly:
Forecast of the next dividend payment
An interim dividend has been issued on 22/03/2013 with a value of 62 cents. The next dividend can be forecasted using the expected dividend
This report provides a price analysis and valuation of the Australian Security Exchange (ASX) listed company, Woolworths Ltd (WOW). Historical data is utilised with the Retention Growth Model to estimate the expected perpetual semi-annual growth rate of the company’s dividends. The Capital Asset Pricing Model is used to estimate the required rate of return for this company and the current expected share price is calculated using the Constant Dividend Growth Model. All data can be found in the appendices.
The results of the analysis show that the WOW stock is undergoing rapid growth and is currently under-priced. The findings suggest that at present, Woolworths Ltd represents a great investment opportunity.
The report also discusses the limitations of the methods used, including predicting future returns from historical returns, the volatility of the risk premium and also changes in the market and firm.
The expected perpetual growth rate of dividends
The Retention Growth Model1 will be used to calculate the expected perpetual growth rate of WOW’s dividends. Using this model, the ratio of reinvested funds is multiplied by the firm’s return average on equity to calculate the estimated growth for the next period.
To utilise this model in assuming the calculated growth rate is constant and perpetual, several assumptions must hold. We must assume that the variables used to calculate the growth rate, namely the return on equity (ROE) and the payout ratio, are constant and sustainable.
With respect to the assumptions mentioned above, historical data of the past five years was used to obtain the average ROE and payout ratio to smooth out fluctuations.
However, WOW issues dividends semi-annually, so the dividend growth rate must be adjusted accordingly:
Forecast of the next dividend payment
An interim dividend has been issued on 22/03/2013 with a value of 62 cents. The next dividend can be forecasted using the expected dividend
References: BISHOP, S., FITZSIMMONS, M. & OFFICER, B. 2011. Adjusting the Market Risk Premium to Reflect the Global Financial Crisis. JASSA The Finisia Journal of Applied Finance. BRIGHAM, E. F., SHOME, D. K. & VINSON, S. R. 1985. The Risk Premium Approach to Measuring a Utility 's Cost of Equity. Financial Management, 14. Google Finance 2013, S&P/ASX 200 Index, accessed 20 May 2013, Google Finance 2013, Woolworths Limited, accessed 20 May 2013, IBBOTSON, R. G. & SINQUEFIELD, R. A. 1976. Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926-1974). The Journal of Business, 49. PAYNE, T. H. & FINCH, J. H. 1999. Effective teaching and use of the constant growth dividend discount model. Financial Services Review, 8, 283-291. Reserve Bank of Australia Statistical Tables 2013, Capital Market Yields – Government Bonds, The Reserve Bank of Australia, last updated 1 May 2013, Woolworths 2012, Annual Report 2012, Woolworths Ltd, Sydney. Woolworths Limited 2012, Woolworths exit from specialty consumer electronics category, Woolworths Limited, accessed 20 May 2013