These 3 Canadian ADRs are overpriced, according to the Dividend Discount Model

Published Sat, 13 Feb 2016 00:00 CET by

Overvalued means that a stock, or in this article the American Depositary Receipt (ADR), trades at a market price that is higher than the stock’s (ADR’s) actual price (present value), showing that it might be time to sell. Analysts calculate a stock’s present value either by using the Dividend Discount Model (DDM) or the Graham formula. Both are solid methods to check if a stock is over- or undervalued relative to its market price, as well as to its peers.
This article discusses three Canadian ADRs that trade in the oil & gas and the metal industries. Two companies are mid-caps, one strongly overvalued and the other slightly overvalued, whereas the large-cap is moderately overvalued.

Name Price ($) Earnings/Share (EPS) Book Value/Share (BVPS) Graham Number Discount to Fair Value Dividend/Share (DPS)
Canadian Natural Resources 20.03 0.28 18.93 10.92 183% 0.68
Franco-Nevada 54.40 0.36 20.70 12.95 420% 0.84
Pembina Pipeline 21.80 0.66 6.10 9.52 229% 1.28

Canadian Natural Resources, Franco-Nevada and Pembina Pipeline YoY Stock Performance Graph
Canadian Natural Resources (USA) (NYSE: CNQ) is a Calgary-based company that engages in the acquisition, exploration, development, production, marketing and sale of crude oil, natural gas and Natural Gas Liquids (NGLs). Canadian Natural Resources offers its products to Western Canada; the United Kingdom, Ivory Coast, Gabon, and South Africa.

Moderately Overvalued: For value investors, Canadian Natural Resources is a sell. According to the Graham formula, the stock is 185.52% overvalued as its present value is lower than the actual market price. Canadian Natural Resources trades for $20.26 and the Graham number is $10.92. By applying the Dividend Discount Model (DDM), the present value is calculated based on a dividend per share of $0.68, a dividend growth rate of 13% and a discount rate of 18%. Thereby, the present value of the Canadian Natural Resources stock is $0.68 / (0.18 – 0.13) = $0.68/0.05 = $13.60. Again, the present value is lower than the market price, suggesting that the stock is overvalued.

Franco-Nevada (USA) (NYSE: FNV) is a Toronto-headquartered gold-focused royalty and stream company that operates in Canada, the United States, Latin America and other global locations. The company holds also assets in other precious metals with interests in 246 mineral assets and 137 oil and gas assets.

Strongly Overvalued: Franco-Nevada currently declares an annualized dividend of $0.84 per share and it currently trades at $51.53. By applying the Graham formula, the stock is strongly overvalued by 397.95% as the Graham number of $12.95 is significantly lower than the stock’s market price of $52.70. Similarly, by using the Dividend Discount Model (DDM) we can calculate the present value of Franco-Nevada stock given its DPS of $0.84, its dividend growth rate of 85% and a discount rate of 92%. Therefore, the present value of Franco-Nevada stock is $0.84 / (0.92 - 0.85) = $0.84/0.07 = $12. Again, the present value of the stock is significantly lower its market price. Franco-Nevada stock is strongly overvalued.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E Beta Payout Ratio
Canadian Natural Resources 20.03 14.60 34.46 37.19% -41.87% 21.42 71.34 1.41 243%
Franco-Nevada 54.40 38.20 56.04 42.41% -2.93% 8.09 143.24 0.43 233%
Pembina Pipeline 21.80 17.88 36.09 21.92% -39.60% 8.23 31.03 0.85 194%

Pembina Pipeline (USA) (NYSE: PBA) is a Calgary-based company that provides transportation and midstream services to the energy industry in North America. Through Conventional Pipelines, Oil Sands & Heavy Oil, Gas Services, and Midstream segments, Pembina Pipeline operates a pipeline network and transports hydrocarbon products, ethane, and crude oil to Canada and the United States.

Slightly overvalued: Pembina Pipeline currently delivers an annualized dividend of $1.28 and its market price is $21.44. Both the Graham formula and the Dividend Discount Model (DDM) suggest that the stock is moderately overvalued as follows: Graham formula suggests that the stock’s present value is $9.52, which is lower than its market price of $21.44, indicating that the stock is overvalued by 225.27%. Similarly, the Dividend Discount Model, considering a dividend growth rate of 34% and a discount rate of 42%, we derive a present value equal to $1.28 / (0.42 – 0.34) = $1.28/0.08 = $16. The market price of Pembina Pipeline is slightly higher than its present value, suggesting the stock is slightly overvalued.

Stock name Dividend Yield
Pembina Pipeline 4.86
Canadian Natural Resources 4.32
Franco-nevada 1.06

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