Evaluating Asset Management firms by using the Dividend Discount Model - Helsinki Stock Exchange
Bui, Ha (2016)
Bui, Ha
Haaga-Helia ammattikorkeakoulu
2016
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-201605147848
https://urn.fi/URN:NBN:fi:amk-201605147848
Tiivistelmä
Some view investing in stock markets as gambling. However, there have been examples of investors who were able to beat the market by using different investment strategies. In Finland, previous studies have shown the ability of value-investing to earn higher returns compared to the market or to growth-investing. The idea of value-investing is to find companies that trade below their true value, or intrinsic value.
This research-based thesis aims at finding companies that are undervalued by the market by using the Dividend Discount Model (DDM). The DDM states that the intrinsic value of a stock is the present value of all future dividends that an investor receives during the holding period and the price at which the investor can sell the stock at the end of the holding period. Focus is placed on the Asset Management industry because of the intensity of companies that have the highest dividend yield. The forecasting period is from 2016 to 2019.
The methodology consists of two stages, the first one being the selection of stocks and the second one being the valuation process. In the selection stage, four stocks that have the highest dividend yield within the Asset Management industry are selected: Norvestia, Panostaja, CapMan and eQ. In the valuation process, the Finnish economy and the Asset Management industry are researched. Then the business condition of the companies is analysed by using different financial ratios. After that, the DDM is applied to calculate the intrinsic value of stocks. The inputs of the model are the forecast data provided by the Balance Value Control (BVC), a service that analyses the future prospect of almost all listed companies in Finland. The intrinsic value is calculated based on three assumptions about the holding periods. It is assumed that an investor buys a stock in May 2016 and sells it in (1) December 2017, (2) December 2018 and (3) December 2019. The calculations were carried out on 3 May 2016, and were then compared to the market price quoted on NASDAQ on the same day.
The outcome of the intrinsic value calculations suggests that the stocks of all the four companies were overvalued by the market in all holding period assumptions. It is recommended that the holding period is extended to March or April after the investor receives the dividend for the previous year. Doing so will increase the sum of the future cash flow due to the addition of the last dividend. The present value, or the intrinsic value, of stocks will increase accordingly.
This research-based thesis aims at finding companies that are undervalued by the market by using the Dividend Discount Model (DDM). The DDM states that the intrinsic value of a stock is the present value of all future dividends that an investor receives during the holding period and the price at which the investor can sell the stock at the end of the holding period. Focus is placed on the Asset Management industry because of the intensity of companies that have the highest dividend yield. The forecasting period is from 2016 to 2019.
The methodology consists of two stages, the first one being the selection of stocks and the second one being the valuation process. In the selection stage, four stocks that have the highest dividend yield within the Asset Management industry are selected: Norvestia, Panostaja, CapMan and eQ. In the valuation process, the Finnish economy and the Asset Management industry are researched. Then the business condition of the companies is analysed by using different financial ratios. After that, the DDM is applied to calculate the intrinsic value of stocks. The inputs of the model are the forecast data provided by the Balance Value Control (BVC), a service that analyses the future prospect of almost all listed companies in Finland. The intrinsic value is calculated based on three assumptions about the holding periods. It is assumed that an investor buys a stock in May 2016 and sells it in (1) December 2017, (2) December 2018 and (3) December 2019. The calculations were carried out on 3 May 2016, and were then compared to the market price quoted on NASDAQ on the same day.
The outcome of the intrinsic value calculations suggests that the stocks of all the four companies were overvalued by the market in all holding period assumptions. It is recommended that the holding period is extended to March or April after the investor receives the dividend for the previous year. Doing so will increase the sum of the future cash flow due to the addition of the last dividend. The present value, or the intrinsic value, of stocks will increase accordingly.