1/

Get a cup of Bru coffee.

Today I will help you understand a simple implied growth calculator to find a stock buy level. Let's get started.

(A short thread)

2/

As you might know, The value of a stock is the present value of its lifetime cash flows.

For the long term buy and hold investor, the real cash flow from the stock is dividend income over its lifetime.
3/

In 1959, M J Gordon proposed a formula for this. The formula is

Value = D/(r-g)

Whereas

D = Expected dividends.
r = Required rate of return.
g = Dividend growth rate in perpetuity.

A detailed derivation of the formula is given at the end.
4/

Now, let's be honest, it is next to impossible to predict the growth rate in perpetuity for a firm.

So we twist the formula a little bit. Rather than finding out value, we find the *implied growth rate* This helps us to make deals with Mr. Market.
5/

Here is some math:

Value = D/(r-g)

r-g = D/value

D/value is nothing but dividend yield, so we substitute the same.

r-g = Dividend yield

g = r-Dividend yield

*Implied growth = Required rate of return - Dividend yield*
6/

Since we got implied growth formula, we can use it in some real-life firms.

Let's take Hind Unilever as a case study. The stock is trading at 83 x of FY 20 earnings. A traditional PE investor right away calls it overvalued.
7/

However, taking an r of 10% and a dividend yield of around 1%, the implied growth comes at 9% in perpetuity.

You have to make a bet here. If you think that the firm dividends grow at that rate forever, you buy or else you avoid.
8/

Let's take another example ITC Ltd. Assuming an r of 10% and a dividend yield of 5%, the implied growth comes at 5%.

Whereas the long-term dividend growth rate for ITC Ltd is 13%. So it looks like the stock is undervalued for some reason.
9/

Also, not all firms pay dividends. So you can use free cash flow in place of dividends.

And take an average number to reduce outlier risk.

Do note that r is not some magical number. So feel free to use your own required rate of return.
10/

Here is the maths behind the Gordon growth model.

Thank you for reading. Enjoy your weekend.

The End.

More from Trading

Option Trading is very difficult to master as there are so many things to understand.

Here is a master thread related that will help a beginner to understand about Options Trading.

A complete course worth Rs 50K for free.

1/ A detailed thread on basics of Option Greeks and how it impacts Options


2/ Basic Option Trading Strategies:

There are many option strategies to trade. But keeping your strategy simple is the key.

In this thread, all the basic option trading strategies are being


3/ What are the things that you should look at before taking any Option


4/ Is Option Selling Possible with Rs 1 Lakh Capital?

Even a beginner can start trading in option selling with capital as low as Rs 1 Lakh.

What are the techniques one can use and how to mitigate the infinite loss risk is shared in this

You May Also Like

Moderna CEO Stephane Bancel was previously CEO of bioMerieux in France from 07-10.

Alain Merieux, who owns bioMerieux, was instrumental in the creation of the Wuhan Institute of Virology P4 Lab.

The same people who helped create the virus, also helped to create the vaccines...


Moderna partnered with French Pasteur Institute in 2015 to develop mRNA vaccine technology.

Pasteur Institute partnered with the Wuhan P4 Laboratory in 2017 along with the Merieux Foundation to study emerging viruses...
https://t.co/yFsHwrNYaK
https://t.co/9M5lydBKhM


Nobel prize winning scientist Luc Montagnier asserts that Sars-Cov-2 is man-made and originated from the Wuhan Institute of Virology.

Montagnier did extensive work with the Pasteur Institute in France which was partnered with the Wuhan P4.

Merieux Foundation & the Chinese government have worked together since 1965, and partnered to study emerging pathogens in Africa in 2015.

Their research included "PATHOGENS CARRIED BY BATS" that provoke respiratory diseases.

🚨🚨🚨
https://t.co/gVwpT0ssqI