I wanted to give another shout out to @Rick for a great presentation last night on how to value a company using the McNiven formula.
(the recording is on the Meetings page).
Here is the presentation if you want a copy:
I cant upload an excel file here, but here's a Google Sheet if you want to play with Rick's spreadsheet (go to File --> Save copy if you want to edit yourself)
@Rick maybe the below is easier for some to understand and is what i do.
it starts with a truism being the one stage DDM being price=d1/(k-g) dividend period one divided by the required rate of return (that I call cost of capital--it doesnt matter) less the growth rate
if we divide both sides by eps we get PE=payout ratio/(k-g) the required rate of return is the same as you have covered and should be risk-adjusted. the growth is ROE (forward-looking, normalised and marginal) times retention. That gives me PE=payout/ (required rate of return-ROE*retention)
i then get a value by using that PE *eps + dps/Sp (add yield), it reconciles to McNivens formula as far as i can tell
so it is all based on the stage one DDM with all the strengths and weaknesses that the DDM has. the main weakness being properly estimating RR and ROE.
imo there is a solid theoretical foundation but as they say, investing is not easy...ive also found it is a weighing machine..ie sometimes takes time
good luck Tuesday
Well it looks like I’m up for a talk about McNiven’s valuation method next Tuesday at 6pm AEDT (20th Feb). I’m hoping this time suits the hard workers amongst us who are wanting to tune in.
After a brief explanation of the McNiven’s formula and the key variables, I’ll share an interesting 10 year chart that compares Codan’s (CDA) share price with valuations that could have been made using McNiven’s formula and the data available at the time. With the wisdom of hindsight, we can consider if these valuations might have been useful or not.
Then we’ll jump into having some fun testing the method. First we’ll see if it works for valuing the equity in a Term Deposit which is 100% predictable and resembles a zero risk business with a low rate of return.
Next we’ll tweak a few variables until the metrics start to resemble one of the big four banks and consider the valuation accounting for some risks and an appropriate margin of safety. @Strawmandoesn’t know it yet, but I’m going to throw a few questions his way while we pressure test the formula! There’s no such thing as a free lunch Andrew! ;)
Then comes the interesting bit! We’ll take a look at a few businesses of most interest to Strawfolk. That’s where I’ll need your help. I have a few pre-prepared just in case you are all too shy (ha!) including NCK, LOV, XRF and PME. I thought we could also look at a trickier one eg. DMP.
I’m keen to explore some other suggestions from you guys. If there are too many suggestions (ha!) I’ll go with the most popular choices.
In putting forward your suggestion, keep in mind that the formula works best for businesses that have been profitable for a few years, and I’ll need your insights into future profitability as well, eg. a few years of your earnings (NPAT) estimates. I need this to calculate the most critical variable, future ROE. I can find all the other data needed from my current data sources.
I’’m looking forward to hearing your suggestions, and to our meeting next Tuesday!
Cheers,
Rick