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QuestionsCategory: Valuation QuadrantPEG valuation using ROE method with Dividends paidout
Yong asked 3 years ago

Hi, I still not quite get it for PEG valuation using ROE method for companies with Dividends paidout. 
Do I need to calculate for Y-O-Y annual growth for 10 years and average out the 9x annual growth results? Trying to custom your spreadsheet to churn out the valuation figures for this method.
Is there any intrinsic value and margin of safety for this method?

1 Answers
Victor Chng answered 3 years ago

Hi Yong,
 
ROE is just a rough guide to the growth of the business. It is still better to find the Y-O-Y growth of the company net profit. 
 
When calculate the growth, you need to find out their compound annual growth rate not their average growth rate.

Yong replied 3 years ago

Thanks, Victor! I still find CAGR is easier to calculate based on beginning & final value. And this only works if the YOY growth is steady and increasing? To get the PE ratio for PEG calculation, we’ve to download all stocks’ adjusted closing from Yahoo Finance and plot the graph for visualization?

Any less time consuming method? Haha. Read somewhere some suggested to get average stock price, EPS to get the average PE.

Victor Chng replied 3 years ago

If you are investing in the US market, there is a software called Y Charts that plot the PE ratio for you but I do not know if they removed one off item. Their service will cost you about US$200 per month.

If you want to all market access on the PE and other valuation method then you can go for Bloomberg, Capital IQ and Thomson Reuter. Their cost will range from US$1500-$2500 per month depending on which service you subscribed.

You can try using the average price to get average PE but I did not use this methodology before so I am not sure of the accuracy of the data.

Yong replied 3 years ago

I recalled you/Rusmin mentioning of using CIMB’s itrade. How reliable is it for us to use iTrade’s Thomson Reuter financial data & ratios (EOI adjusted, shareholders attributed) within?

Actually, based on example of 2 years summarized data, difficult for me to understand the ROE method and how is it actually applied to get true nature growth % of dividend stocks.

I do agree if having a complete 5-10 years record, it makes more sense to get CAGR of either Revenue, Net Profit or Cashflow (steady/Y-O-Y growth). Hence, where/how do we apply ROE (minus Dividend Payout) method?

There’s this article which proposes using Dividend Adjusted PEG ratio for dividend stocks (in absence of complete 5-10 years financial results):
https://www.thebalance.com/dividend-adjusted-peg-ratio-357146

Formula: (Share Price/EPS) / (Analyst’s Projected Growth Rate + Dividend Yield)
1) Can we substitute ROE within? Hence become: PE / (ROE + Dividend Yield)

2) If above is incorrect application, how is it appropriately used, if at all?

It will be great if your team can provide dummy financial numbers of different companies for easier grasp / understanding of using the suitable valuation method. This will definitely speed up learning for beginners and we can focus more on the qualitative aspects of B&M quadrants :)

Victor Chng replied 3 years ago

Hi Yong,

At the end of the day, we want to keep the valuation method simple. There is no one size fits all valuation method. All valuation method are only a rough figure based on the investor thinking and experience that derived the intrinsic value (IV). The important thing, the the margin of safety that the investors is paying and how conservative is the valuation method.

Under the valuation quadrant, we have a table there telling you what type of companies fit which valuation method. You can click the link below.

https://investmentquadrant.com/the-valuation-quadrant/