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Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer....

Question:

Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends:

Year Dividend per share
2019 $2.51
2018 $2.27
2017 $1.83
2016 $1.16
2015 $1.49

Assume that the historical annual growth rate of Seagate dividends is an accurate estimate of the future constant annual dividend growth rate. Use a 19% required rate of return to find the value of Seagate's stock immediately after it paid its 2019 dividend of $2.51.

Dividend Discount Model:

This problem calls for utilization of the constant growth dividend discount model, also known as the Gordon Growth Model. It is a widely used stock valuation model that establishes the price of a stock based on its future dividends, which are assumed to grow at a constant rate.

Answer and Explanation:

The answer is $56.40.

The first step in solving this problem is to determine the historical compound annual growth rate (CAGR) of the firm's dividends. The CAGR formula and the actual computation are illustrated below.

CAGR = (Ending Value/Beginning Value)^(1/n) - 1

CAGR = $2.51/$1.49^(1/4) - 1 = .1393 or 13.93%

Now, we can utilize the growth rate in the dividend discount model (DDM), which is outlined below.

P0 = D1/(r-g)

Where,

P0 = intrinsic value of stock

D1 = dividend payment one year from today

r = discount rate

g = growth rate

To solve for g, we must be cognizant of the fact D1 = D0(1+g). Armed with this awareness, we can structure and solve the problem, using known information, as follows:

P0 = $2.51 (1.1393) / (.19 -.1393) = $56.40


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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