Referring to the DDM model, in the case of dividend reinvestment, stock return = (ROE/PB)*d+ROE*(1-d)
Among them, d is the dividend rate. Part of the investor’s return comes from the dividend return, and part of it comes from the company’s value appreciation due to profit retention;
Under the assumption that the company is sustainable and PB is 1, the stock return is equal to the long-term ROE;
Assuming that high ROE can maintain stability, it may be better if no dividends are distributed, because companies with high ROE can make retained profits also obtain sustained high returns. But in reality, high ROE is unlikely to maintain high ROE for a long time without dividends;
For investors, the level of return is related to two factors: long-term ROE (related to the quality of the company) and PB (related to the price to buy). That is, when buying, you must not only choose a good company, but also buy at a cheap price.
Assuming that its future ROE is 11% (the historical ROE has always been above 11%), the dividend rate is 30%, and the current PB is 0.64,
Its stock return = (0.11/0.64)*0.3 + 0.11*0.7 = 0.0516 + 0.077 = 12.85%
In the case of long-term low PB, even if ROE is not so sexy, the yield after dividend reinvestment is still good.
Shuanghui shares
Assuming that its future ROE is 25% (the ROE in the past 5 years are 31.40%, 34.06%, 37.37%, 32.93%, 21.80% respectively), the dividend rate is 92% (the dividend rate in 2021 is 1.298/1.41=92%, Note that Shuanghui has been paying high dividends this year, but as the parent company’s debt repayment pressure eases, the subsequent dividend rate should be reduced), the current PB is 3.83,
Its stock return = (0.25/3.83) * 0.92 + 0.25 * 0.08 = 0.06 + 0.02 = 8%
Buy at a high PB price, the higher the dividend rate, the lower the yield.
Assuming that its future long-term ROE is 8% (the ROEs in the past 5 years are 7.14%, 8.67%, 7.90%, 4.44%, and 9.35% respectively), the dividend rate is 76%, and the current PB is 0.67.
Its stock return = (0.08/0.67) * 0.76 + 0.08 * 0.24 = 0.0907 + 0.0192 = 11%
In the case of long-term low PB, even if ROE is not so sexy, the yield after dividend reinvestment is still good.
$Yangtze River Power(SH600900)$
Assuming that its future long-term ROE is 15% (the ROEs in the past 5 years are 16.91%, 16.31%, 14.77%, 16.71%, 14.92%), the dividend rate is 70%, and the current PB is 2.95.
Its stock return = (0.15/2.95) * 0.7 + 0.15 * 0.3 = 0.0356 + 0.045 = 8.06%
If Changjiang Power can maintain an ROE of 15%, if the PB is 2.95, the rate of return will be higher if no dividend is paid. In the case of no dividend at all, the rate of return will be ROE, that is, 15%. But buying at the existing PB multiples yields less than ideal yields. Of course, the advantages of Yangtze Power lie in two points: 1) the stability of its performance; 2) the unique business model of hydropower will gradually increase the ROE in the future (the reduction of financial expenses and depreciation will gradually turn into profits)
CDFG
Assuming that its future long-term ROE is 30% (ROEs in the past 5 years are 19.12%, 20.56%, 25.61%, 29.37%, 37.33%), the dividend rate is 30%, and the current PB is 10.68.
Its stock return = (0.30/10.68) * 0.3 + 0.3 * 0.7 = 0.028 + 0.21 = 23.8%
That is, the long-term return of buying at the current price is 23.8%, but there is an assumption here: its long-term ROE remains at 30%. Whether this assumption is true or not depends on our judgment on CDFG’s business model and future development. (Another company I can think of that has maintained an ROE of more than 30% in the past 5 years is Kweichow Moutai).
Of course, the above assumed long-term ROE is based on historical calculations, and there are two risks here: 1) Whether it can be maintained in the future, or even higher; 2) There will definitely be fluctuations in ROE each year in the future. For risk 1), we need to deeply analyze the company’s business model, competitive advantages, and market conditions to determine whether it can maintain its current ROE. If we think the company’s future competitive advantage will be better, we can even improve this ROE assumption . For risk 2), ROE fluctuations are unavoidable, so we need to hold a long-term perspective. In addition, the dividend rate in the future may also change with the operating conditions of the company.
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