Published Fri, 05 Feb 2016 18:15 CET by DividendYields.orgOvervalued describes a security with a market price that is considered too high based on the company’s fundamentals. For instance, a stock may be overvalued because investors have confidence in the company. A rise in investor confidence will surge the demand for the security, thereby increasing the market price. However, if the company’s balance sheet is not strong enough to support the market price, the stock will most likely decline in due term. Also, if the security is fairly valued and its price is not declining when the company’s fundamentals deteriorate, the security is most likely overvalued.
Beyond a company’s fundamentals, analysts use the Dividend Discount Model (DDM) to assess the present value of a security based on its projected dividend growth and dividend discount rate. Analysts look into the stock’s dividend history to calculating the average dividend growth over a certain period. For instance, if a stock has a dividend growth of 135% over the last 15 years, the projected average growth is 9% per year. The dividend discount rate is calculated considering the average dividend growth. Therefore, if the company declares a Dividend Per Share (DPS) of $ 1.85, with a 9% growth it will reach $2.02, but $2.02 is actually worth $1.75 today, because if you had $1.75 today, you could turn it into $2.02 with a 15% discount rate.
This article discusses three overvalued large caps that trade in the Beverages - Soft Drinks industry. All three stocks are trading over their present stock value, thereby representing opportunities to sell. The table below indicates that investor confidence is very important in determining the market price. PepsiCo and Dr Pepper Snapple are significantly overvalued (their market price is three times up their present price), although their fundamentals are not that strong.
|Name||Revenues Q3 2015||Revenues Q3 2014||% Change||Net Income Q3 2015||Net Income Q3 2014||% Change||Dividend/Share (DPS)|
|Dr Pepper Snapple||1630||1583||3%||202||188||7%||1.92|
The Coca-Cola Company (NYSE: KO) is an Atlanta-based beverage company that engages in the manufacturing and distribution of more than 500 sparkling and still brands around the globe. The Coca-Cola Company features its products primarily under 20 brand names, including Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Fanta, Sprite, Powerade, and Schweppes, among others, that generate more than $1 billion in annual retail sales. The Coca-Cola Company network is comprised of company-owned or controlled bottling and distribution operators, as well as independent bottling partners, distributors, wholesalers, and retailers.
Dividend Discount Model: Coca-Cola declares a dividend of $1.32 per share and its current market price is $42.44. Based on its dividend history, the projected dividend growth rate is 6% and the relevant discount rate is 10%. Thereby, the present value of the Coca-Cola stock is calculated as follows: $1.32 per share / (0.1 discount - 0.06 dividend growth) = $33. Given that the market price is higher than the present price, Coca-Cola is overvalued, representing an opportunity to sell.
Dr Pepper Snapple Group (NYSE: DPS) is a Texas-headquartered beverage company that engages in the manufacturing and distribution of non-alcoholic beverages in the United States, but also in Canada, Mexico, and the Caribbean. Through its Beverage Concentrates, Packaged Beverages, and Latin America Beverages segments, Dr Pepper Snapple offers a range of carbonated and non-carbonated beverages (NCBs) under the Dr Pepper, 7UP, Schweppes, Snapple, Mott’s, and other brand names.
Dividend Discount Model: Dr Pepper Snapple declares a dividend of $1.92 per share and its current market price is $94.75. Based on the stock’s dividend history, the projected dividend growth rate is 15% and the discount rate is 8%. Thereby, the present value of the Dr Pepper Snapple stock is calculated as: $.1.92 per share / (0.15 discount - 0.08 dividend growth) = $1.92 / 0.07 = $27.42. Since the present value is significantly lower than the market value, Dr Pepper Snapple is significantly overvalued, representing a great opportunity to sell.
|Name||Price ($)||52 wk low||52 wk high||52 wk low %||52 wk high %||Market Cap ($ b)||P/E||D/E||Beta||Payout Ratio|
|Dr Pepper Snapple||89.27||72.00||95.87||23.99%||-6.88%||17.65||24.81||0.97||0.76||51%|
PepsiCo (NYSE: PEP) is a New York-based company that operates in the food, snack & beverages industry, globally known for a range of brand names, including Lays, Ruffles, Doritos, Cheetos and Quaker brands, among others. PepsiCo’s Asia, Middle East and Africa segments provide snack foods, cereals and snacks, beverage concentrates, fountain syrups, and finished goods as well as ready-to-drink tea products. T through a network of authorized bottlers, independent distributors, and retailers.
Dividend Discount Model: PepsiCo declares a dividend of $2.81 per share and its current market price is $92.21. Based on the stock’s dividend history, the projected dividend growth rate is 27% and the discount rate is 18%. Thereby the present value of the PepsiCo is: $0.72 per share / (0.27 discount - 0.18 dividend growth) = $2.81 / 0.09 = $31.22. Given that the market value is significantly higher than the present value, PepsiCo is significantly overvalued, thereby representing a huge opportunity to sell.