In the text, we discussed using the dividend growth model to estimate a stock’s intrinsic value. To keep things as simple as possible, let’s assume at first that XOM’s dividend is expected to grow at some constant rate over time. If so, the intrinsic value equals D₁/(r_s - g), where D₁ is the expected annual dividend 1 year from now, r_s is the stock’s required rate of return, and g is the dividend’s constant growth rate. To estimate the dividend growth rate, it’s first helpful to look at XOM’s dividend history.  Staying on the current Web page (WORLDSCOPE—INCOME STATEMENT RATIOS) you should immediately find the company’s annual dividend over the past several years. On the basis of this information, what has been the average annual dividend growth rate? Another way to get estimates of dividend growth rates is to look at analysts’ forecasts for future dividends, which can be found on the ESTIMATES tab. Scrolling down the page you should see an area marked “Consensus Estimates” and a tab under “Available Measures.” Here you click on the down arrow key and select Dividends Per Share (DPS). What is the median year-end dividend forecast? You can use this as an estimate of D1 in your measure of intrinsic value. You can also use thisforecast along with the historical data to arrive at a measure of the forecasted dividend growth rate, g.

Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson

ONE—Business School Edition online database to work this chapter’s questions.

Estimating ExxonMobil’s Intrinsic Stock Value In this chapter we described the various factors that influence stock prices and the approaches that analysts use to estimate a stock’s intrinsic value. By comparing these intrinsic value estimates to the current price, an investor can assess whether it makes sense to buy or sell a particular stock. Stocks trading at a price far below their estimated intrinsic values may be good candidates for purchase, whereas stocks trading at prices far in excess of their intrinsic value may be good stocks to avoid or sell.

While estimating a stock’s intrinsic value is a complex exercise that requires reliable data and good judgment, we can use the data available in Thomson One to arrive at a quick “back of the envelope” calculation of intrinsic value.