Description of the Company
Daimler AG is a German transnational company that deals with the manufacturing of motor vehicles. The headquarters of the company are in Stuttgart, Germany. The firm ranks as the third-largest automobile manufacturer in the world. Apart from manufacturing motor vehicles, the firm also offers financial products via its Daimler Financial Services division. In addition, the firm has interests in the aerospace company EADS, McLaren racing company, and the Japan-based truck manufacturer, Mitsubishi. Daimler manufactures both cars and trucks. Its popular brands include Mercedes-Benz, Maybach, and Freightliner. Daimler’s non-automotive business segment was established mainly to offer financial and insurance products.
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Value vs. Growth Investors
Value investing is an investment approach that is based on the investment concepts of Ben Graham and David Dodd. It essentially entails purchasing stocks perceived as under-priced according to fundamental analysis. The stocks include those shares exchanging at a discount to book value, those with high dividend yields, or low price to earnings ratio. The discount between the intrinsic value of a stock and its market value has been sometimes called the margin of safety (Pandey 55). Value investing promotes a defensive investment strategy where one invests in under-priced stocks as a safeguard against adverse price movements.
Performance of Value Investors
Empirical evidence shows that value investing has been a successful investment approach (Pandey 45). There are various methods of assessing the success of this strategy. One method entails investigating the performance of simple value indicators such as price-to-earnings ratio, price-to-free cash flow ratio, etc. A lot of studies have been done comparing the performance of value and growth stocks. Most of these studies concluded that value stocks always perform better than growth stocks.
Growth investing is an investment strategy that involves buying those stocks which portray super-normal growth. There are various approaches to implementing a growth investment strategy. Some of these approaches are purchasing stocks in emerging markets, buying recovery shares or shares of blue-chip companies, and buying stocks of small companies.
Dividend Growth Model
The dividend growth model (DGM) is a technique of fundamental analysis used to establish the value of a share or a firm (Gordon 103). The method is employed as an investment strategy that utilizes dividend yield (Sharpe 19). The approach is used to determine the value of a stock or a firm using the pattern of the dividend stream formed by a firm over the years. Even though many investors do not subscribe to this approach, it is still vital for dividend investors being familiar with the strategy.
Firms that have a good pattern of dividend yield and payout ratios are perceived as reliable and less risky investments with opportunities for generating income and capital gains. The DGM model indicates how a company has been performing in the past.
Because the DGM model portrays past performance, it does not guarantee a company’s future performance. Still, an investor can use the information generated by the model to make informed investment decisions. In making such decisions, the DGM model is significant for constructing an investment portfolio based on growth objectives.
Steps in Implementing the Dividend Growth Model
The dividend growth model has three key components: firm’s payout ratio, dividend growth rate, and the required rate of return (Gordon 105).
(Daimler Stock Overview 2011)
Daimler’s beta= 1.96 (Daimler Stock Overview 2011).
Risk-free rate (One Year Treasury Bill): 19% (Daimler Stock Overview 2011).
Market Return (S&P 500 Index): 2% (Daimler Stock Overview 2011)
Required Rate of Return= 19 + 1.96×2= 22.92%
Share price= Current Dividend (1+Dividend growth) /required return-Dividend growth
=$2.2-(1+0.19)/0.2292-0.19) =$25.76 (Intrinsic value)
Actual market price as of 24 May, 2012: $38.47
Comparison of Intrinsic and Market Value
The market price of Daimler’s stock is higher than its intrinsic value indicating that the stock is overpriced in the market. Specifically, the stock is overpriced by a margin of $12.71 ($38.47-$25.76).
For investors who hold the stock, it is better to sell it because when the market becomes efficient so as to reflect the correct price, the share price is going to fall towards its intrinsic value.
Daimler Stock Overview 2011. Web.
Gordon, Myron. The Investment, Financing, and Valuation of the Corporation. Homewood, IL: R. D. Irwin, 1962. Print.
Gordon, Myron J. “Dividends, Earnings and Stock Prices.”Review of Economics and Statistics, 41.2 (1959): 99–105. Print.
Pandey, Francis, Financial Management, Mc Graw Hill: New York, 2008. Print.
Sharpe, William, Investments, Prentice Hall: London, 2009. Print.