My Valuation Method and How I Determine Target Prices

Darts and cobwebs part II

wili_hybrid / Foter.com / CC BY-NC

I have a hard time keeping my Dividend Stock Analyses under 3,000 words. A large portion of the analysis is spent explaining my valuation method and how I determine a target price. In an effort to make my analyses more concise, I’ve decided to create a separate post that describes my valuation technique and just link to the explanation from the dividend stock analysis. Hopefully this should make my dividend stock analyses easier to read, and if the reader wants a better understanding of my methods the information is still available in this post.

My Valuation Method

There is a misconception out there that dividend investors only care about the dividend and don’t worry about the stock price. I can’t speak for everyone, but this certainly isn’t the case for me. I believe it’s important to purchase stocks at a reasonable to cheap price. This helps preserve your capital and will generally result in better returns. Rather than rely on just one method, I like to use a variety of different methods. Using this approach allows me better identify reasonable targets. I find that one

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Overcome Dividend Yield Valuation Flaws and Find Reasonable Target Prices Fast

Oil Sands Plant - Suncor Energy

Suncor Energy / Foter.com / CC BY-NC-ND

Last week I went over how you can compare the current dividend yield to historical averages to see if a stock is undervalued. The idea being that if the dividend is sustainable and the current yield is higher than the 3, 5, and 10 year high yield averages then the stock is likely undervalued.

You can run into problems with this technique in a few situations however. Sometimes a company has a high yield because they are going through problems or because the market expects a dividend cut. If you look at the yield before a dividend cut, it will usually be higher than the historically high yield averages. No one likes to invest in a company right before a dividend cut, so it is important to see if the dividend is sustainable before using this valuation technique. AGF Management Ltd comes to mind when I look at the May 31, 2013 version of Canadian Dividend All-Star List. AGF Management Ltd’s current yield of 9.44% is 32.7% above its 10 year average highest yield, but by looking at the payout ratio I

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