My method for determining the fair price of a share

Reading time: approx. 12min

1. ) INTRODUCTION

I recently asked you on Getquin to vote on which topic I should address in one of my future articles. About 65% of you voted that the topic of "fair share price" should be addressed and therefore requested a contribution on this topic.

The question of what constitutes a fair price is indeed initially subjective. A common definition is that the fair price of a share is the sum of its discounted cash flows [1]. This definition is also the basis for the well-known discounted cash flow method (DCF method) [2], which assumes a growth phase and a terminal phase and discounts all future cash flows to determine the fair value of a share. What exactly "discounting" means and how to apply it will be explained later in the article.

Before I explain my method in detail, however, I would like to mention some limitations. My method is just one method among many and not the method with which you can determine the exact value of a share in 10 years to two decimal places. Every method makes assumptions and, in case of doubt, is only as good as the assumptions that are made. Such models also react very strongly to small changes in the input values, so that a change in the interest rate from 5% to 3% can already lead to considerable changes in the final result.

It is therefore always advisable to make rather pessimistic (or at least realistic) assumptions in all analyses and always deduct a margin of safety at the end.

2.) FREE CASH FLOW

The method is based on the estimate of the free cash flow of a company over the next few years. Free cash flow is a popular key figure among investors, as it indicates how much of the operating cash flow (= money generated through business activities) is actually available to investors. Free cash flow can be calculated from a company's cash flow statement, for example, in which the operating cash flow the so-called capital expenditures (capex) from the operating cash flow:

Free cash flow = operating cash flow - capex

Capex includes all capital expenditures "for longer-term assets, such as machinery, buildings, but also original equipment, spare parts, computer systems" [4]. Fortunately, we can read both operating cash flow and capex from a company's cash flow statement. I use free cash flow for my method because free cash flow is less influenced by accounting subtleties than EBITDA, for example.

For the method presented here, it will be important to estimate a company's free cash flow for the coming years. Like any estimate, a free cash flow estimate is of course not error-free and is subject to uncertainties. We also want to keep the estimate as simple as possible. I estimate the free cash flow as follows:

EBITDA

- Capex

- Taxes

+ Stock-based compensation

= Free cash flow

This is an estimate that can be used to get a pretty good idea of a company's free cash flow. Many small details that play a role in the cash flow statement have not been taken into account here, but in most cases these are not so important. As a reminder: we wanted a simple and robust estimate of the free cash flow.

Now that we have a way to estimate free cash flow from EBITDA, let's go one step further and get to the valuation of a company based on free cash flow. I personally like to use the so-called free cash flow yield. The free cash flow yield is obtained by putting the free cash flow generated in a year in relation to the market capitalization (=price):

FCF Yield = FCF / Marketcap = (FCF/share) / (price/share)

The FCF Yield indicates the percentage of market capitalization generated annually by the free cash flow. The higher the FCF Yield the lower the lower the valuation. Microsoft, for example, is valued at $MSFT is valued at around 2% FCF Yield, Apple $AAPL with 3.4%, Exxon Mobil $XOM with 9% and British American Tobacco $BATS with 19%. Microsoft's business model is seen as low-risk, secure and with recurring revenues, whereas British American Tobacco currently has so many risks and shrinkage scenarios priced in that it has such a high FCF yield.

The FCF yield with which a company is valued depends in particular on the security of the business model, the future growth prospects and the existing risks. This can of course change over time: at the beginning of the 2010s, Microsoft was still valued with an FCF yield of around 10%. In the case of a declining FCF yield, we speak of a multiple expansionas the company's cash flows are seen as increasingly secure. If you had bought Microsoft at a 10% FCF yield and Microsoft was still generating exactly the same cash flow today as it was at that time, at today's valuation level (2% FCF yield) you would still have quintupled the original investment quintupled.

3.) MY METHOD

The basis for any earnings or losses of a company is initially always the turnover: if this increases, there is a chance of earning more money in the future; if it decreases, it becomes more difficult to earn more money. How much profit a company makes can be measured by the so-called EBITDA (earnings before interest, taxes, depreciation and amortization). The ratio of EBITDA to sales is known as the EBITDA margin. If a company improves its EBITDA margin, it becomes more efficient, with proportionately more EBITDA remaining from every dollar earned. As mentioned in the free cash flow section, we can estimate free cash flow from EBITDA using capex, taxes and stock-based compensation.

Example: A company generates € 1,000 in sales and achieves an EBITDA of € 400. In addition, capex of € 100 and taxes of € 50 are incurred. The company spends €5 on stock-based compensation. The company then has an EBITDA margin of 40% and an approximate free cash flow of

FCF = € 400 - € 100 - € 50 + € 5 = € 255.

If the company's market capitalization is currently €10,000, it would have an FCF yield of €255/€10,000 = 2.55%.

If we now estimate the future sales growth, the future EBITDA margin, the future expenses for capex, taxes and stock-based compensation, we can estimate the future free cash flow. If we can then estimate the FCF yield with which a share can be sold in X years, we can estimate the future market capitalization of the company. If we also take into account the number of outstanding shares and any share buybacks by the company, we can also estimate the price per share in X years.

4.) EXAMPLE: PHILIP MORRIS $PM

To better understand the method, it is advisable to look at a concrete example. I have specifically chosen Philip Morris $PM. Before we start, however, it is important to define the investment period. Since I want to invest for the long term, I set the investment period at 10 years. This is completely arbitrary at first, but in general, the shorter and longer the period, the greater the inaccuracies. With shorter periods, we are subject to excessive cyclical fluctuations in the free cash flow and with longer periods, the model becomes less accurate due to the high sensitivity.

Warning: a lot of figures and estimates follow, which can only be put into a suitable format here on Getquin to a limited extent (to put it euphemistically). I have attached a screenshot of my personal Excel sheet so that you can better understand a lot of things there. The following data is taken from [5]:

i. The inventory (TTM, all figures in millions):

Market capitalization = USD 145,040

Number of shares = 1.551,1

EBITDA = USD 13,449

Capex = USD 1,357

taxes = 2,428 USD

Stock-based compensation = 0 USD

ii. Calculation of free cash flow & margins:

Free cash flow = 13,449 - 1,357 - 2,428 + 0 = 9,664 USD

EBITDA margin = 39,2%

Capex / turnover = 4,0%

Taxes / turnover = 7,1%

We now have an overview of the actual state of Philip Morris. We now want to estimate what these figures will look like in about 10 years. We estimate this:

Sales growth (annually)

EBITDA margin (in 10 years)

Capex / sales (in 10 years)

Taxes / sales (in 10 years)

Share buybacks in % (annually)

Stock-based compensation / EBITDA (in 10 years)

As we can see, we have to make a number of estimates here which, depending on how they turn out, can have a massively influence the final result. If we are too optimistic, we can calculate almost any future price, no matter how high. If we are too pessimistic, almost any price today will be too expensive.

iii. The development of the company:

A real treatise on my assessment of Philip Morris' corporate development would be too extensive at this point and would be enough material for a separate post (feel free to comment if you wish). Therefore, here is the short version of my assessment:

Philip Morris is struggling with the declining volume of cigarettes. For years there has been a decline in volume of around 2% annually, which has so far been offset by price increases. In principle, I assume that sales of cigarettes will decline by around 1% per year over the next 10 years. In the area of risk reduced productshowever, i.e. IQOS and snus in particular, Philip Morris will grow by 15-20% annually and IQOS is set to enter the US market in 2024. The management itself expects overall Group sales growth of 7-9% per year.

The new risk-reduced products also have a higher margin than traditional cigarettes, meaning that the EBITDA margin can even be expected to increase slightly in future as their share of total sales grows.

The last few years have been characterized by high investments (=capex), especially in the new product categories. The products are now ready for the market and we are entering a phase in which there will be slightly less capex. I also assume that tax expenditure will be around the average of recent years and that share buy-backs will resume as cash flows increase and investments decrease.

Overall, my long-term estimates are

Sales growth = 7% annually

EBITDA margin = 42%

Capex / Turnover = 3%

Taxes / turnover = 7.5%

Share buybacks in % = 0.3%

Stock-based compensation / EBITDA = 0%

iv. possible price in 10 years:

A little percentage math and a few Excel formulas later, we see that in 10 years, Philip Morris is estimated to be worth 21,241.1 million USD in free cash flow in 10 years. In addition, the number of outstanding shares has increased to 1.505,8 shares outstanding.

Philip Morris is currently valued at an FCF yield of 6.9% is currently valued. If the valuation does not change in 10 years, the market capitalization in 10 years will be USD 307,842 million. If this is divided by the number of shares outstanding in 10 years, the price per share is approximately 204 USD. At the current price of around USD 90, this would correspond to an annual return of around 8.6% would correspond.

This does not take into account a possible multiple expansion/deflation, i.e. an increase/decrease in the FCF yield. Furthermore, we still have to discount the future share price in order to determine the fair value today.

5.) FAIR VALUE WITH MARGIN OF SAFETY

The last variable to be included in our estimates is the so-called risk free rate comes into play. This is the risk-free or low-risk interest rate that you receive, for example, for investments in government bonds, fixed-term deposit accounts or similar. For example, if you receive 5% per year for a 10-year investment in a fixed-term deposit account, you would have to invest around €614 today to receive €1,000 after 10 years: the money you receive in 10 years is discounted at 5% per year. discounted annually (614€ = 1.000€ / (1,05)^10).

In the same way, we must also discount the future share price, as we could also invest the money today at a fixed interest rate for 10 years. Of course, there is a lot of leeway in the valuation: if we assume a low risk-free rate, today's share prices will automatically increase; if we assume a high risk-free rate, today's share prices will decrease. Incidentally, this is also the reason why the stock market generally reacts sensitively to changes in interest rates.

If we assume (conservatively!) an average risk free rate of 6% we obtain the current fair value of Philip Morris:

204 USD / (1.06)^10 = 114 USD

After all the estimates, calculations and discounting, we have now arrived at a fair value of 114 USD per share. However, as already mentioned several times, this is a model that makes many assumptions, estimates and idealizations. It is therefore always advisable to apply a margin of safety should always be deducted. I deduct a flat rate of 20% from my calculated fair value, resulting in a total value:

Fair value w/ MoS = 91 USD

This value is fairly close to the current share price of around USD 90 / share, so that our estimates and assumptions should not be too far off the mark.

To conclude this section, here are a few examples that show how sensitively our model reacts to changes in certain estimates. All examples assume that the other estimates/parameters remain the same:

• 3% risk free rate --> fair value 152 USD
• 2% annual share buybacks --> fair value 134 USD
• 9% sales growth --> fair value USD 137
• 38% EBITDA margin --> fair value 99 USD

6.) SUMMARY & OUTLOOK

Based on the current company balance sheet and our estimates for the company's development, we can use this method to determine a fair value for a share. A possible multiple expansion/deflationi.e. a change in FCF yield in 10 years. In the screenshot attached to the article, you can get an overview of how this parameter influences the valuation today (return distribution).

If you are interested, I can provide you with a corresponding Excel template. Just comment below the post. Then I will think of a suitable solution to provide you with the template.

Finally, I would like to mention again: take the final result with a good portion of caution to you. There is no guarantee that my model describes reality even approximately correctly, as there are many subjective assessment by me. As a small consolation, there will soon be an article that will show you that in many cases the price of a share is not as important as you might think.

As always, I am open to questions, suggestions and criticism.

Stay tuned,

Your Michael Scott

#cashflow

#aktien

Sources:

[1] Wikipedia: https://de.wikipedia.org/wiki/Abzinsung_und_Aufzinsung

[2] Wikipedia: https://de.wikipedia.org/wiki/Discounted_Cash-Flow

[3] BWL-Lexikon: https://www.bwl-lexikon.de/wiki/free-cash-flow/#berechnung-direkte-methode

[4] Business lexicon: https://wirtschaftslexikon.gabler.de/definition/capex-52700

[5] SeekingAlpha: https://seekingalpha.com/

🦷 Why you don't need dividends for monthly cash flow -.

Dividends put to the test 🦷

Hi guys, this post is to explain why a dividend-only investment strategy is not a panacea and as the young whippersnapper that you are, you should definitely reconsider whether you should really focus fully on dividends and payouts with an investment horizon of more than 15 years.

Stop! What?
Dividends always make sense! After all, I regularly get money flushed into my account without doing anything for it. Anyway, I prefer to have the money directly in my hand, so that no one can take it away from me. And anyway, dividends are a sign of quality; if the company has paid out dividends for the last 20 years, it will do so for the next 20 years as well.

Oh, and I want to live off my monthly cash flow in my old age, then the portfolio can continue to grow in peace and I can live off the dividends! It's much better than constantly withdrawing something from the portfolio, because at some point I'll have nothing left. That can't happen to me with dividends!

Well? Who would sign one or the other sentence above in the same way?

What if I tell you that all of the above is a misconception, based on assumptions and a dividend strategy can have its pitfalls. What you should keep in mind when implementing your dividend strategy, we clarify in this article.

If you want to do further research after this article, you can simply google the terms "Dividend Fallacy" or "Homemade Dividend Policy" and/or read the article by Gerd Kommer listed in source [3].

Introduction - Why are dividends so popular?

In times of zero interest rates, when we hardly got any interest on our savings, dividends were proclaimed to replace interest. In 2008, the last time there was almost an average of almost 2% on the overnight money [1]. There is certainly no question of savers being spoiled in the last decade. So alternatives were needed.

If savings no longer yield anything, investments have to be made. In the past decades, the capital market has regularly generated higher returns than the interest paid. So what could be more obvious than declaring the dividend the new interest rate?

It sounds totally simple. I buy a stock that pays dividends or an ETF that pays dividends, and I get regular cash inflows into my account. It's tangible, it's quickly explained, it's easy to understand, and it's a story that can be told. As the amount invested increases, so do the dividends. More money in, more money out. Zack, another story that can be told and shared on getquin in droves.

getquin gives us the opportunity we all know to share our portfolios with other investors. One combination of words is sometimes read very often in the requested feedbacks. The talk is about the desire for "monthly cash flow". Without exception, people try to achieve this monthly cash flow by means of dividends. Why one has nothing to do with the other, and which pitfalls are waiting for you when investing in high-dividend stocks, I would like to explain step by step.

So let's start by pulling a few teeth.

🦷#1 - Dividends are free money

The dream of passive income, getting money for doing nothing. Or at least sit down once, make the effort and collect money afterwards with a clear conscience. That is the goal of many investors. How convenient for us are the dividend-paying companies, because if I am invested in the company anyway and take the price gains with me, then I take the additionally paid dividend with me. The fact that dividends are by no means free money is shown by the fact that the total return of a share price consists of two components:

Price yield + dividend yield = total return.

Example:

If a share has a price of 100€ and has paid out 5€ in one year, i.e. a dividend yield of 5%, as well as a price increase of 10%, the total return is 15%.

The same share would also make a total return of 15% without paying out dividends, except that the dividend yield would then be 0% and the price yield 15%.

In both cases, €100 later became €115, except that in one case a portion is paid out, and in the other case the money stays in the company.

Psychologically, we like the first variant better. Technically, it makes no difference.

This is because both the price yield and the dividend yield originate from the same pot of the company: the profit. Even if the company does not pay out the dividend, it still remains part of the profit and will be reflected in the price yield.

So to claim that dividends are free money is not true, because if you turn the above logic around and keep the payout for yourself without reinvesting it, it clearly comes at the expense of total return, which means that the bottom line is that assets grow more slowly. So we pay for the dividend at the price of no return.

Reinvesting dividends. That leads us directly to the next tooth.

🦷 #2 Once I have received dividends, no one can take them away from me

This statement is quite true. The money goes into your clearing account, so now it's yours. But now it is absolutely crucial what you do with it. If you leave it in your account or even use it to pay your gym dues, you're diminishing your return. Why? Because we 🦷#1 already learned that without a dividend yield, all that's left is the pure price yield. If that's not high enough, or if the dividend yield discount is very large anyway, it has a significant impact on our wealth accumulation.

ExampleAllianz

Let's look at the past year 2022 of the Allianz share. Without reinvested dividends, the share price performance was -3.3%. With the reinvestment of the dividend, however, it is +2.0% [2]. So whether we use the dividend for the gym or put it back into the portfolio is the difference between winning and losing, even over a one-year period. With a long investment horizon, the lower compound interest effect is even more noticeable.

As long as you have not reached your financial goal, you should not think about using the dividends for something else than putting them back into the portfolio. If you reinvest the dividend in the same stock, you're giving it away again and transferring it back to the company. So yes, a dividend paid out is yours, but you still shouldn't keep it for wealth accumulation.

🦷#3 The higher the dividend yield, the better

Every serious dividend investor knows that dividend yield is not the only factor when it comes to selecting dividend stocks for a portfolio. But why should it be? A guaranteed yield of more than 10% sounds tempting.

The dividend yield is made up of the dividend agreed at the last Annual General Meeting and the current share price.

With a distributed dividend of €5 and a share price of €100, we have a 5% dividend yield. If our share gets into difficulties and loses 50% of its market value, the dividend yield is suddenly 10% at a price of 50€. Now we have to analyze carefully why the share has such a high dividend yield and whether the price loss behind it is to be taken more seriously. No one wants to put their money into companies that are doomed, even if they receive promising payouts in return. In the event of a sustained share price loss, a reduction or cancellation of the dividend in the near future is not out of the question, but very likely.

🦷#4 Dividends are a secure passive income

Let's get to the point where we take apart the phrase "dividends are the new interest" mentioned in the introduction. While, at least with fixed income, interest is secure over the agreed period, dividends are not at all. While it is possible to make deductions for the future from the past, none of them can be considered set. Dividends are paid voluntarily by the companies, the shareholder has neither a claim to continued payment, nor can he prevent a reduction or even cancellation if decided by the company.

Thus, there is a clear difference in the beneficiary's claim between interest and dividends, but also the risk level of one's own asset allocation takes on a whole new level if one tries to equate dividends with interest.

This circumstance can, but does not have to, lead to the fact that a surely expected payout is reduced or does not take place at all, which of course has an impact on the already accustomed monthly cash flow.

🦷#5 It is the same whether I accumulate or reinvest the dividend itself again

Not quite true. Accumulation and reinvesting dividends are not the same thing. Since taxation is handled differently with reinvestment than with distributors, there are advantages and disadvantages here as well.

Until 2018, an accumulating ETF could benefit enormously from the so-called tax deferral benefit. Due to the fact that until 2018 no capital gains accrued during the term of a reinvesting ETF, the complete gross dividend was reinvested and the maximum benefit from compound interest could be gained. The taxation was only due upon sale and was thus deferred, i.e. deferred.

The introduction of the advance lump sum has put this into perspective to a certain extent. Nevertheless, the tax burden of the reinvestor is lower.

Below the tax-free amount, it really makes no difference whether you are a payer or an accumulator. Everything that accrues in dividends ends up 1:1 back in the ETF, in both cases.

The situation is different above the tax-free amount.

Distributing ETF:

Deposit value 01.01.: 100.000€

Deposit value 31.12.: 110.000€

Price gain: 10.000€

Dividend yield: 2.01%

Dividend paid: 2.010€

Total return: 12,01%

Total profit: 12.010€

Taxes to be paid (70% of the dividend paid): 1.407€

Taxes payable (26.37%): 371.03€

Net dividend available for reinvestment: €1,638.97

New deposit value: 111,638.97€

Increase in value: 11,638.97€

Accumulator ETF:

Deposit value 01.01.: 100.000€

Deposit value 31.12.: 112.010€

Total return: 12.01%

Total profit: 12.010€

Advance lump sum 2023: 1,785%

Base income: 1.785€

To be taxed (70% of the base income): 1.249,50€

Taxes to be paid (26.37%): 329.49€

New deposit value: 111.680,51€

Increase in value: 11.680,51€

The accumulator therefore remains at a slight advantage when it comes to long-term wealth accumulation. The difference in what remains after taxation, with the same price gains and yields, is about 42€ for the accumulator with a securities account value of 100,000€. The selected dividend yield corresponds to that of the FTSE All World Dist.

In the whole calculation, the amount of the upfront lump sum or the underlying prime rate plays a decisive role. In recent years, this has even been negative, so that the upfront flat rate was not applicable. According to Finanztip, an average upfront flat rate of 1.5% is realistic, i.e. slightly below the value used in the calculation for 2023.

We can also swap out other variables in the equation and look at a high-dividend ETF. The taxable portion grows, the price return suffers, as the comparison of the FTSE High-Dividend Yield with the FTSE All World shows.

That's why I would advise anyone with a high-dividend ETF in their portfolio today who is not reliant on monthly cash flow and has an investment horizon of more than 15 years to reconsider this investment.

🦷#6 Dividend payments do not eat into the substance of the portfolio

Let's get to the most important point of the list and the hook of this post.

"Dividends are not necessary for monthly cash flow". Why? Because both dividend payments and the sale of shares eat away at the substance of the portfolio. Why is that?

We are fast-forwarding a few years into the future and are now approaching retirement. As of now, we want to reap the rewards we sowed the decades before. Our portfolio has reached a value of 1,000,000€ and we are looking at two withdrawal strategies. On the one hand we improve in account A our pension with 2% dividend payouts and on the other hand we sell in calculation B we simply sell 2% shares on a regular basis. In a first consideration we leave out taxes and transaction costs. Later I will go into this again.

Calculation A

Deposit value beginning: 1.000.000€

Number of units in the depot: 10.000 units

Unit value: 100€

Distribution (2%): 20.000€

Distribution per unit: 2€

Unit value after distribution (dividend discount): 98€

Number of units after distribution: 10,000 units

-> Deposit value end: 980.000€

Calculation B

Deposit value beginning: 1.000.000€

Number of units in the depot: 10.000 units

Unit value: 100€

Withdrawal via sale of units: 20.000€

Number of units sold: 200 units

Number of units after withdrawal: 9.800 units

Unit value after withdrawal: 100€

-> Deposit value end: 980.000€

In both cases, i.e. dividend distribution as well as withdrawal by sale of shares, our deposit value decreases. The previously mentioned drawn teeth are also included in these findings. Dividends are not free moneybut part of the company's profit, which is simply not returned to the company but paid out. The dividend discount ensures that our shares become less valuable and if we do not compensate for this by reinvesting the dividend, our portfolio loses substance.

From the point of view just considered, it does not matter whether I realize my monthly cash flow by dividends or replace it by manual withdrawals from the portfolio. This consideration was listed by Messrs. Franco Modigliani and Merton Miller as early as 1961, and provided as an explanation why dividend policy is irrelevant to corporate value. A dividend payout could be replicated by the investor at any time and thus a so-called Homemade Dividend Policy could be implemented [5]. The gentlemen received the Nobel Prize in Economics for this work, among others.

But what about when we take taxes and transaction costs into account?

One thing to start with: I am firmly convinced that there will be some changes in the next 30 years as far as taxation, transaction costs and the sale of shares are concerned. Almost certainly, in the future, we will have the option of investing withdrawal plans with our broker. As we currently have monthly besavings, we will also be able to entsave. This means that you don't have to be active yourself every month or every quarter.

What about taxes?

Taxation will change, but let's look at the current situation: 26.37% flat tax on capital gains and partial exemption on equity ETFs. In addition, an allowance of 1000€.

Does it make a difference whether I receive dividends or sell shares? No.

We pay taxes on capital gains. Both dividends and the sale of shares fall under capital gains. Of course, we cannot compare apples with oranges and assume the distribution/withdrawal from an ETF. Individual shares are therefore excluded. Again, the partial exemption applies to both variants. Just like the tax-free amount.

From today's perspective, neither variant has any tax advantages or disadvantages.

What about transaction costs?

Dividend distributions do not incur transaction costs, while sales do. An advantage for dividends. But are transaction costs so high that they are the death knell for our monthly cash flow from sales? That will depend on the broker and on what else changes in this area in the coming years. Today, sales are already free or cost only 1€. With direct banks one is there fast with 1%-1,5% of the payout sum. Does not sound so beautiful. With the already presented withdrawal plans, however, this could (subjunctive!) be adjusted in one way or another. Savings plans to build up a portfolio also follow a different cost structure than one-time purchases. Of course, for 1€ transaction costs, inflation must also be taken into account, but I for my part consider transaction costs to be negligible already today, and even more so in 30 years.

To reduce transaction costs, one could also switch to quarterly sales.

Conclusion

This contribution was not entirely altruistic. I wanted to answer the question whether I will have to replace my initially selected accumulation funds in the near future. The sense of the dividend made sense to me, too, even though monthly cash flow has never appealed to me in any way. But it is better to think about old age today. In addition, the upfront lump sum brings a previously new component into play that disputes the tax advantage of accumulating ETFs over distributors.

With an expected average advance lump sum of about 1.5% (statement of Finanztip), however, accumulators continue to have the compound interest advantage over distributors. Optimal, therefore, and still the first choice for me when it comes to long-term asset accumulation.

And with the knowledge I have gained, I can now make withdrawals from the portfolio, knowing that dividends are technically nothing else. Psychologically, dividends may be motivating. However, seeing the portfolio value and assets grow is motivation enough for me.

There may still be changes coming in taxes and transaction costs, but even with today's option, there would be no significant downside.

So I have a conclusion for me draw a conclusion.

What can you take away from this?

A slightly different perspective on dividends!

Should you change your strategy now?

No. You should sit down and do your own calculations and research. In addition to the bare figures, your own strategy also includes your own psychology, risk tolerance and investment horizon.

Why did I talk about an investment horizon of 15 years at the beginning?

Within the next 15 years, I would expect the taxes and costs that apply today. To speculate on changes would be negligent. Since dividends do not cause transaction costs and I personally would not want to hold a million-dollar portfolio with a neobroker, I consider distributors to be the better choice for this situation.

With one, and especially myinvestment horizon of 30+ years, the situation is different. There I go with the Thesaurierer and the manual withdrawal. This is my personal assessment.

Thanks for reading!

Liked, commented or leave a follow.

Sources

[1] Tagesgeld - Entwicklung des Zinssatzes bis 2022 | Statista

[2] https://www.allianz.com/de/investor_relations/aktie/kurs.html

[3] https://gerd-kommer.de/dividendenstrategien-fakten-und-fantasien/

[4] https://www.justetf.com/de/news/etf/etf-und-steuern-das-neue-investmentsteuergesetz-ab-2018.html#thesaurierend

[5] https://m.diplom.de/document/227062

[6] https://finanzbiber.com/dividend-fallacy/

#dividenden
#dividendenstrategie
#cashflow

Why does it always have to be dividends?

It feels like every day I read about "passive income" and cash flow, which can apparently only be obtained by buying dividend stocks. Even beginners describe divided portfolios with the words "Great that you are investing" or "Looks good".

I find this highly problematic. False information or a lack of knowledge is being shared without any educational work being done. In purely financial mathematical terms, dividends offer no known advantages over the partial sale of shares. Due to the tax disadvantages, dividend investors are often even worse off.

And I'm not talking about companies like Apple, Microsoft or Walmart that pay dividends.

Rather, I am talking about buying/focusing on so-called high dividend stocks such as BAT, Realty Income or Imperial Brands, where the dividend yield is significantly higher and are better known as "cash flow" stocks.

If you point out your strong focus on dividends at a young age, with a long investment horizon, you will immediately be confronted and rebuked by a seemingly "qualified" dividend investor with some irrational arguments.

The following "arguments" have popped up on my screen recently.

When buying dividend stocks, you don't have to sell shares to get money. But you do when you sell part of your shares, because at some point you will have 0 shares.The tax-free allowance can only be effectively utilized through dividendsDividends are predictable incomePsychological motivation through dividendsCash flow in a crashShares are worth nothing without dividends

The facts

From a financial mathematical point of view, it makes no difference whether I receive € 30 in dividends per month on my € 10,000 custody account or whether I sell part of it to the same extent. In both cases, money flows from the share into my clearing account. And just because you can't read the dividend discount 1:1 in the share price, it still exists and reduces the value of your share position. Just like the sale of shares. This is because the dividend does not fall from the sky, but is based on the profit of the distributing company.It makes no difference whether € 1000/2000 dividends per year are used to exhaust the tax-free amount or whether profits are realized to the same extent. If for you a predictable income means that it is 100% dependent on the management of the company, then that is probably the case. After all, dividends can be reduced or canceled at any time. You are also dependent on the dividend yield. You cannot control this yourself. So from a tax perspective, you don't want to receive €3,000 in dividends this year. However, you cannot refuse distributions and €3,000 in dividends will flow into your settlement account. With the partial sale, you are free to choose the "distribution date" and even determine the amount yourself.Motivation is important and if it helps you invest, so much the better. Unfortunately, however, this is not a rational argument for focusing on dividend stocks. So you accept significantly poorer performance just to continue investing?Let's say your portfolio is currently down 10 %. Your dividend yield is 3%. In purely mathematical terms, your portfolio value is -13% after the dividend payout. The dividend is deducted from the company account/value - keyword "dividend discount" You can also simply sell 3% of your portfolio in a crash. In both cases, your money sits in the clearing account without earning interest.As just mentioned, you do not need dividends to participate in the success of the company. This is because the non-distributing company can carry out share buybacks or pay off existing debts. All of this should generate more returns. The company becomes more valuable because there are fewer shares in circulation or it is less indebted. For two identical companies, the share price would be lower for the distributing company than for the company that invests the money in share buybacks. This action should be reflected in a rising share price.

When will "dividend investors" finally understand that there are no rational advantages to focusing on dividend stocks? Since when have facts been ignored to such an extent and bogus arguments been used as a basis for justification?

A few sources:

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373
• https://www.chicagobooth.edu/review/dividends-are-not-free-money-though-lots-investors-seem-think-they-are
• https://gerd-kommer.de/dividendenstrategien-fakten-und-fantasien/#:~:text=Ein%20viertes%20Element%20der%20Dividend,etwas%20geschenkt%E2%80%9C%20%E2%80%93%20offensichtliches%20Wunschdenken.

I would like to share this valuable contribution from the community again. It always gives me some hope that there are some rational investors out there:

https://getqu.in/Of8gdq/

#dividenden
#cashflow
#irrational
#fakten

💸CASH IS KING - Corporate Multiples - KCV💸

BETTER OR NOT? The relative key figure KCV!

Since there were a few questions about the KCV under a post the other day, here is a brief explanation 😊

For the first classification of whether a company is favorably valued, the P/E ratio or KUV is often used. The KCV is often forgotten, which can also be used and offers various advantages, but also disadvantages to other relative ratios, such as the P/E or KUV.

Like the P/E ratio (price/earnings ratio) or the KUV (price/turnover ratio), the KCV (price/cash flow ratio) is a relative ratio and expresses the ratio of a share price to the cash flow per share. [1]

In contrast to the P/E ratio, cash flow rather than earnings is the relevant counterpart for determining the KCV.

Cash flow:

"Cash flow, also referred to as cash flow statement or cash flow, is a key figure that reflects the profitability of a company. It takes into account the cash flows within a company. In simple terms, when calculating cash flow, all incoming and outgoing payments within a certain period are offset against each other. The difference that results is the cash flow." [2]

We divide the cash flow statement into 3 parts. These can also be easily identified in the cash flow statement in any annual report:

-Cash flow from operating activities

-Cash flow from investing activities

=Free cash flow

-Cash flow from financing activities

=Cash flow

Free cash flow is calculated from operating cash flow less cash flow from investing activities and indicates how much money is left over to repay loans, pay dividends or buy back shares. Free cash flow is therefore a parameter often used by investors to assess strategic corporate decisions and shareholder value!

-Examples Cash flow from operating activities: Cash outflow from rental payments, cash from sales of products/services, payment of taxes, cash outflow from payment of wages and salaries.

-Examples cash flow from investing activities: purchase/sale of machinery, disposal of subsidiaries/assets.

-Examples cash flow from financing activities: payment of dividends, repayment/borrowing of loans, share buybacks, cash from capital increases

Calculation and valuation of KCV:

Calculation:

Cash flow per share / Price per share

or

Cash flow / market capitalization*

*Market capitalization = price per share x shares outstanding

For the cash flow in the calculation of the KCV, the cash flow from operating activities or the free cash flow is usually used. If key figures from different sources are used, it is therefore always important to know which cash flow was used.

Valuation:

A KCV < 1 would mean that there is more cash flow available in the company than the company is even worth or traded on the stock exchange. This would mean a huge undervaluation or that we are in a value trap and the company is in significant trouble, which is why the market is valuing the company at a junk price.

However, with relative ratios, there are generally no clear benchmarks as to when they can be considered cheap or expensive. You always have to look at comparable companies, previous periods and historical developments to classify them correctly. There are also always sector differences.

As a rule of thumb:

KCV < 15-18 favorable

P/B ratio < 1 favorable

KUV < 1 favorable

P/E < 15 favorable

PEG < 1 favorable

Below are two links to companies that have an extremely low KCV. Whether this makes them cheaply valued is not yet conclusively clear. But maybe they are worth a look (no investment advice).

European companies with high cash flows and thus low KCVs: https://www.boerse-online.de/nachrichten/aktien/kcv-von-unter-10-24-reiche-und-unterbewertete-europaeische-aktien-20332099.html

20 stocks with high cash flows and thus low KCVs: https://www.boerse-online.de/nachrichten/aktien/kcv-von-unter-10-diese-20-unterbewerteten-aktien-schwimmen-im-geld-20323270.html

Advantages KCV [1]:

- Less susceptible to accounting policy manipulation. Please have a look at my articles on impairment or big bath accounting.

- better comparability with other companies, compared to the P/E ratio (due to different accounting standards).

- the P/E ratio is not applicable for companies with losses. The KCV, on the other hand, can be used well here.

Disadvantages of KCV [1]:

-Cash flows can fluctuate more. For example, the sale of a large plant or subsidiary is directly reflected in the cash flow, but is of a one-off nature. However, such an event does not have the same effect on profit. Therefore, several comparison periods should be used.

-Although cash flow per se cannot be influenced (compared to profit), payments can be withheld by management in order to present cash flow more positively in a certain period. For investors, these measures are hardly visible. Therefore, several comparison periods should always be used.

In general, it should be noted that relative key figures only represent a "relative" value and can only provide information on whether a key figure appears favorable in comparison to previous periods or comparable companies.

Conclusion:

The KCV is a relative key figure that is often forgotten. However, it should be noted that several comparison periods are used in order to identify and interpret fluctuations in cash flow. Nevertheless, it offers some advantages. However, relative ratios should never be used in isolation. The combination of relative ratios and intrinsic valuation should be the key to success. However, to get a comprehensive picture of a company, I recommend integrating the KCV into your valuation.

Maybe this post helped you a bit more @Boarkeinname

For further and more in-depth knowledge on business valuation, I recommend the following article:

https://app.getquin.com/activity/laOUVhfFDI?lang=de&utm_source=sharing

Sources:

[1] https://www.finanzen.net/lexikon/chartanalyse/kcv

[2] https://www.weltsparen.de/glossar/cashflow/

Images:

https://www.cpapracticeadvisor.com/2014/09/05/rule-1-cash-is-king/5713/

#learn

#theaccountant

#Bewertung

#Multiples

#Cashflow

#Kennzahlen

My dividend calendar 🗓️

Hello dear community,

in order to keep up with the trend even belatedly, I have brought my personal dividend calendar here.

In total there are 28 dividend payers with 108 paydays.

#dividenden
#cashflow

Since some users had asked the other day because of Hercules Capital:

Today there was nice news 💸

https://seekingalpha.com/news/3892091-hercules-capital-declares-036-dividend?source=copy_to_clipboard

#dividende
#cashflow
#ukw

💸 1,452€ Dividends in January '23💸

Hey Freunde🙋‍♂️. The new year starts with a good cash flow! This is also necessary, because February will be rather weak

➡️ In total, 29 companies (or ETF/CEF) have given me 1.452,09€ in dividends. The top payers were. $IFN , $PBR , $ORCC , $FRG and $MO !

➡️ For a better classification, there is info on the 3rd page about what the current market value of the top 5 stocks is. In addition, I have given the absolute performance (i.e. including dividends) as well as the current and personal dividend yields.

How many dividends did you receive in January and which company was the biggest dividend payer❓?

#aktien
#dividende
#cashflow
#etf
#investment

Sometimes I wonder if dividends are the way to go when you can generate cash flow that way too....

How do @GoDividend
@Dividente
@dividend_doctor_ and the many dividend investors this proposal?

#dividende

#cashflow

This was the message from 26.01. about $ORI

Old Republic Intl Corp. fourth-quarter earnings per share of $0.80 beat analyst estimates of $0.56. Revenue of $2 billion beat expectations of $1.86 billion.

Dividend increase of 6.52% today.

Even "boring" investments pay off in the long run, continuously increasing the #cashflow in#dividendendepot

Receive a dividend every month from these three companies.

Altria: US02209S1033

Caterpillar: US1491231015

Unilever: GB00B10RZP78

I have all three companies in my

share portfolio. Feel free to write in the comments what you think of these companies.

*disclaimer: The information provided does not constitute investment advice or a solicitation to buy or sell securities or other financial products at any time. It is my own opinion and not investment advice, recommendation, tax advice or other professional advice. Please always conduct your own research on multiple platforms in parallel.*

#dividende
#aktien
#money
#Geld
#Investitionen
#vermögen
#cashflow
#mindset
#stocks
#passivincome
#geldanlage
#buyandhold
#motivation
#ziele
#depotupdate
#getquin
#parqet
#finanzen
#dividendenstrategie
#immobilien
#reits
#etfs
#kryptowährung
#ip
#investmentpanther