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Valuation using Future Earnings

This method uses an estimated growth rate for earnings and pay-out rate for dividends to forecast the future value of the business. The company’s future value is then discounted back to present value to get the value of the business. It values a business as an investment opportunity.

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Valuing "WPP WPP PLC"

Valuation Assumptions

Latest quoted share price £  
Number of ordinary shares  
 
Number of years to project    
Required annual rate of return   %  
 
Latest reporting financial year    
Total cash & cash equivalents £
Total interest-bearing debts £
Net profit £
Net profit annual growth   %  
Dividend payout   %  
P/E   x  

Valuation Results

  • Price & Intrinsic Value Chart
  • £18.33
    Highest price you can pay to get 10% annual return
    17.4%
    Your annual return if you pay at market price £13.23
    13.8%
    Your annual return if you pay at intrinsic value £15.47
    +16.9%
    Value Vs Price variation

Projection Horizon

Year Growth Net Profit Dividend
2017 12.6% £1,318,554,528 £578,845,438
2018 12.6% £1,484,448,466 £651,672,877
2019 12.6% £1,671,214,350 £733,663,100
2020 12.6% £1,881,478,183 £825,968,922
2021 12.6% £2,118,196,361 £929,888,202

Calculations

Net profit in year 2021 £2,118,196,361
Market value in 2021 (£2,118,196,361 x 16.1) £34,102,961,407
Total dividends received over the period £3,720,038,539
Expected total return in year 2021 (£34,102,961,407 + £3,720,038,539) £37,822,999,946
Value of company operations (£37,822,999,946 discounted at 10%) £23,485,107,168
+ Add cash & cash equivalents £2,437,000,000
- Less total interest-bearing debts £6,099,000,000
Business intrinsic value £19,823,107,168
Business intrinsic value per share £15.47

+Tips & Advice

  • A company with strong business franchise often has consistent earnings with a long-term upward trend. Consistent earnings are usually a sign that the company is selling products that don’t need to go through the expensive process of change. The upward trend in earnings means that the business’s economics are strong enough to allow it either to make the expenditures to increase market share through advertising or expansion. Steady earnings make profit projections more reliable. A company in a fiercely competitive industry is prone to booms and busts, and profits are often erratic. Its share price swings wildly, caused by the company’s unpredictable earnings and sometimes can create the illusion of buying opportunities for traditional value investors. Exponential growth in earnings is very hard to sustain. Very few companies have actually maintained high double-digit growth for a decade. Even when growth is well established, there are ceilings in every marketplace. As that ceiling is approached, growth becomes difficult to sustain and eventually fades. Look for businesses that can generate internally funded future long-term average sustainable growth of 10% to 20%.
  • Companies adopt dividend policies to suit their business needs. The dividend pay-out percentage is usually related to the sectors they operate and business strategies they adopt. Stable low-growth companies often pay out high percentage of earnings. Too high dividend pay-out ratio can affect earnings growth as the company reserves less cash to re-invest in the business for future growth.
  • Theoretically the faster a company is expected to grow, the higher the price to earnings (P/E) ratio that investors would award it. It is one measure of how cheap or expensive a share appears. P/E ratios vary widely from the sector average even though the constituent companies may all be engaged in broadly similar businesses. This is because one company may be more efficient and profitable than the other and so the market might recognise this by awarding the more profitable share a higher P/E. Beware, many high P/E shares have in the past been the most awful long-term investments when the promise of future rapid growth failed to materialised. In contrast many low P/E companies operate in perceived dull industries have proved over time to be outstanding investments. For businesses that operate in a cyclical industry with unstable earnings you should use the weighted average of earnings for a more reliable reflection of the company’s earnings power.