Investment in Stock Markets Assignment Help
Investment in stock markets is a blend of appetite for risk and reward. One would be induced to invest in stock markets only if he foresees a positive reward for the same. Reward of investing in stock markets is the dividend earned, and it depends upon the profit made by the organisation. (Taillard,2012)
Thus, analysis of where and when to invest involves analysis of dividend so as to understand fairly the possible results of investment and to decide whether to invest or not?
To make this tedious and confusing task simple have been established several models that facilitate analysis of dividend and thus the analysis of stock. This enables investment decision making to a greater extent.
One of the most credible and used method of dividend valuation is the Gordan’s Dividend Growth Model also known as Gordon Constant Growth Dividend Valuation Model and is based upon the work of Myron. J.Gardon in 1960. This model helps in determining the intrinsic value of a stock, exclusive of the persisting market condition and it assumes that dividends shall grow at a fixed/constant rate till perpetuity. (Higgins, 2008)
Statistically, it is represented as,
Vo = D1
( Er -g)
D1 = Next Year Dividend Per Share
Er = Investor’s discount rate or Required rate of return
g = The Expected Dividend Growth Rate
Investment in Stock Markets Assignment Help
For, the purpose of our better understanding and practical analysis of the Gordon Model, we have taken real historical data’s from DATANALYSIS for dividend paid by 4 major companies operating in different industries listed on the Australian stock exchange over the period of 10 years spanning from (01/07/2004-30/06/2014). The industries chosen for this purpose are,
- National Australia Bank Limited (NAB):- National Australia Bank Limited is one of the major players of the Banking industry in Australia .It is listed on Australian stock exchange since 1962 and is currently trading with a market capitalization of $81,365 Million comprising of 2,353.8 million shares. The company is majorly engaged in banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance and custodian, trustee and nominee services.
- Ansell Limited (ANN):- Ansell Limited is one of the leading healthcare equipment & Supplies Company in Australia. It is listed on the exchange since 1985. Today it boasts of a market capitalization of $2,785 million. The company is engaged in developing, manufacturing & sourcing, distribution and sale of gloves and protective products in the industrial and medical gloves market, as well as the sexual health and well being category.
- BHP Billiton Limited (BHP):- BHP Billiton is one of the major mining industry participants in Australia. It is listed on the exchange since 1885. It is one of the oldest. It has a market capitalization of $119,740 million and a share base of 3,211.8 million shares. The company is engaged in exploration of natural resources like potash, coal etc. and development of mines with a purview towards assisting in sustainable development of the nation while not compromising with the demand of present.
- Coca Cola Amatil Limited (CCL):- Coca Cola Amatil Limited is the leading player in the FMCG category in Australia it deals in food and beverage industry and is nominated as being one of the most popular FMCG players in the country. With a market capitalization of 6.93 billion. This organization has strong fundamentals to drive the market demand in its own direction.
For the purpose of our analysis of the dividend for a period of 10 years for all of the aforementioned companies, there data’s have been tabulated into the following spreadsheet and the data for the companies appear in the individual spreadsheet’s bearing the name of the companies.
Dividend is the distribution of company’s earning declared by the management for its common shareholders. Dividend is of various types and it has been experienced that almost all of the companies have declared the following types of dividend,
- Interim Dividend: These are the dividend that is declared by the organization prior to its AGM and prior to the declaration of its year-end financial results. Companies with good financial performance may choose to reward its shareholders with this kind of interim dividend on a quarterly or semi-annual basis. Howsoever it must be noted that an interim dividend is never an obligation on the company. (Tija, 2009)
- Final Dividend: Final dividend is the dividend declared for the shareholders class after the closing of financial year and usually at the AGM. These are the rewards out of the yearly performance of the organisation, and are usually a determinant of performance for the masses and other stakeholders.
- Special Dividend: Some companies like in our analysis Coca Cola Amatil limited had declared a special cash dividend in lieu of its good performance. However this type of dividend is not taken into account while determining the year- end dividend income.
The dividend and its equivalent computations may be found in the workbook below,
Use of a constant growth rate
Gordon Model assumes the dividends to grow in perpetuity at a constant growth rate provided the organisation is in a stable state. The model is a simple and powerful tool to valuate equity and it works on an assumption that the rate at which the dividends would grow would be constant and stable. Now this appears true in theoretical approach but practically it is more of an assumption because the market behaviour towards a particular stock can never be constant and thus the intrinsic value generated by the Gordon model may hence give misleading results. The annualised constant growth rate may be derived by the formula,
Dividend current year = Dividend Base year * (1+g) ^ (n-1)
This has been computed for all the 4 companies under consideration and may be observed in the below mentioned excel workbook against individual companies worksheet’s.