Category Archives: Investing

Investing, Market News, Options, Retirement, Stock Markets

Expert Daytrader Alerts: Master The Global Financial Markets

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Follow Trades from the Experts – Daytrader Strategy Alerts Beat the Market!

  • Tech Stocks
  • Dividend Stocks
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  • Crypto / Gold & Silver
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Investing, Retirement, Stock Markets

Stock Markets: Understanding the Dow Jones Industrial Average

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One of the most important factors in gauging the stock market is Dow Jones Average; this index was established by a great publishing company that is still trusted by many investors.

Investors can measure the stock movements using this index and it is a trustworthy indicator of potential trends in both stocks and bonds. If you are interested to know more about it, this article is for you!

Introduction: A Brief History

The history of the Dow Jones Industrial Average all goes back to the end of the 1800s. A time the stock market was reaching the public interest. Considering that no TV or internet was available to the people back then, it should be easy to see that Charles Henry Dow and Edward D. Jones came up with a great idea in publishing stock news for the masses.

This financial news publisher was a daily magazine that published the news of 1 major stock back then. They created a chart of 12 houses of these 12 companies. As time went ahead, Dow Jones stock Averages added more and more companies in their charts; they indicate stock substitution, correlated changes and other factors based on divisor.

These Average signs facts are to show the Average prices of each stock on a daily basis. Dow Jones Industrial Average or DJIA is now based on 30 different stocks on an industrial basis. There are other stocks, they cover as well; Dow Jones transportation stocks, Utility Composite and several; bod Averages along with that. Here is a total list of Dow Jones Average magazine covers;

  • Dow Jones Industrial Average or DJIA- stock of 30 companies in total
  • Dow Jones Transportation Average or DJTA- stock of 20 transportation companies in total
  • Dow Jones Utility Average or DJUA- stocks of 15 Utility companies in total
  • Dow Jones Composite Average or DJIA- this Average considered the total composite of DJAI DJTA DJUA put together
  • Bond Shares

This magazine is the leading stock magazine for decades for an investor who we trying to measure their markets. Although other popular scales of the stock market in American Securities Market are: the S&P 500 Index and the Russel 2000 Index.

As one of the area’s most favored stock advisors, this publishing service has done great services for investing public. The most interesting aspect was that this magazine was a market analyst journalist rather than investors.

When this magazine started to publish, it was the blooming years of the stock market. Some even believe it was the effect of Dow Jones Average journal that led to much great marketing minds to jump-start their activity.

As the economy grew, many companies added to the stock market Average. However, from there, is only one local company that has been a part of Dow Jones’s Average magazine from the beginning; this magazine was named General Electric that has seen more than a century together with Dow Jones Average publisher.

Annual Dow Jones Average Trends

This magazine has always stood proud in the hallmarks of stock history. Although experts mark the 2008 financial crisis that was a widespread low time for many, it also affected Dow Jones’s Average publishing.

This hallmarks are concentrated on a market’s doomsday; 29th of September in the year 2008. Dow Jones Average loss was to a point that was recorded in the whole history of the stock market.

It was technically the third-ranking the history of stock loss registration. On the contrary, the golden year for stock ranking registration was the year 1915; a value increase of 81.66 increase.

Mutual funds in Dow Jones Average Publishing

If you are fascinated by the magnificence stock sharing company. you can invest it. The easiest way to get in the game with Dow Jones Average is to make an indirect investment; you can invest by buying index fund shares.

However, any of the index funds such as mutual funds and exchange-traded funds are replicable. That means they can replicate before fees and expenses; by holding similar stocks in the exact same proportions.

Downfalls and setback of Dow Jones Average magazine

Some expert believes that Dow Jones Average offers an inaccurate representation of overall market performance. According to Eric Edelman, one of the greatest and most accurate stock critics, S&P 500 and Russ3l 300 indexes are much more accurate when it comes to stock predictions.

Some other critics have pinpointed to price based criteria of their index; they claim that Dow Jones Average magazine gives a higher price to some stocks; these stocks are usually are given a higher influence to compare to their cheaper counterparts.

This is for their lack of comprehension of the stock’s price relativity to a particular company’s size and market capitalization. This way of calculation affects the price of the stock percentage. It results in showing a company’s stock market a lot weaker in the size is much smaller.

The same counter effect causes the large stocks to decide for Dow Jones Average magazine total index; that is the reason many smaller companies have been unhappy with the relevant results. For instance, being and UnitedHealth Group have the largest stock on Dow Jones Average’s Index.

The method of their calculation makes these two giant shareholders the most influential factor over the index data of this publishing.

Conclusion

Dow Jones Average magazine is one of the leading and oldest magazines in the stock market. While there are many who subject to this magazine’s function, others have been their loyal customers. As it goes for every system, there are advantages and disadvantages in any given system; and Dow Jones Average is not exempt from this fact.

Recently there has been a study conducted on the correlation facts in Dow Jones Average publishing data. This comparison has taken place between index movements. The result has revealed that these correlation compounds are higher at the time of the market including cycle; similarly, when there is a flat effect in the market, this correlation rises.

Dividend Stocks, Financial Stocks, Investing, Retirement

Financial Education: Stock Dividends vs. Stock Splits

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Every investor has one goal in mine when they are investing in a company – and that is to earn income. Cash dividends may be distributed during some periods due to a company’s success. There are times that companies do not allocate their wealth through cash.

But it is not a clear indication that the company is already failing. Declaring a stock dividend or a stock split are the two corporate strategies that can be used in dealing with different situations.   

What is a Stock Dividend?

Stock dividends are distributed by corporations to their shareholders as payment through additional shares. Shareholders receive stock dividends issued through an additional number of shares of the same kind held by them. The additional dividends come from up to 25 percent of the existing number of shares outstanding.

Therefore, the worth of the market value per share will remain unchanged. Instead of declaring cash dividends, corporations prefer issuing stock dividends as payment for plenty of reasons which will be discussed later on. 

To exemplify the outcome of a stock dividend, let’s presume that a motorcycle manufacturing company obtains 300,000 shares outstanding. The corporation earned $600,000 at the end of the year. If we are going to compute for its earnings per share, you are going to get $2 per share.

The market value per share outstanding is $60. As a result, the price per earnings ratio or the multiple that measures the relativity of the company’s annual net income earned to the market value per share is 30.

Instead of issuing cash dividends, the board of directors decided to distribute 10% stock dividends to give back to its shareholders. The corporation will have 30,000 additional shares (300,000 shares outstanding x 10%).

Thus, a shareholder that owns 30 shares will obtain 2 additional shares. This will affect the earnings per share which decrease to $1.82 and the price per earnings ratio rises to $32.97. Consequently, the shareholder that possesses 30 shares still owns an unaffected total value of $1,800.  

Stock Dividends are classified into two kinds:

  1. Small Stock Dividends: Stock dividends are deemed as small if it is below 20-25% of the total number of shares outstanding before the dividend declaration occurs. 
  2. Large Stock Dividends: Stock dividends are considered large if it is above 20-25% of the total number of shares outstanding before the dividend declaration occurs. 

What is a Stock Split?

A stock split occurs when more than 25% of the dividends are equally distributable to the shareholders.

Just like in stock dividends, dividends are transferred from retained earnings to the capital accounts and the shareholders will maintain the amount of their total market value. The commonly applied stock split is 2-for-1 and 3-for-1. It simply requires corporations to divide a share to 2 or 3 and it will still result in the same total dollar value.

For instance, a pharmaceutical company has 500,000 shares outstanding with $50 per share issued a 30% stock dividend.   The board of directors planned to divide its stocks by 2-for-1. Subsequent to the stock split, the market value per share will be $25 and will increase its number of shares by 500,000. Therefore, a shareholder that has 2,000 shares outstanding will acquire additional 2,000 shares and retains the total value of shares.

Comparison

Companies declare a stock dividend or a stock split to aim for long-term objectives. As a result, the investors will acquire a number of shares higher than the number of shares that they had before the distribution of stock dividends or the occurrence of the stock split. As a company proclaims a stock dividend or a stock split, its investors are anticipating better financial performance because it can now sell its shares for a lower price. 

Justifications for a Stock Dividend or a Stock Split

A company may declare a stock dividend due to its need to fuel its financial growth. These companies appropriated their cash and temporarily distributed stock dividends because they are planning to make new projects or intending to satisfy their debts. However, the declaration of stock dividends may also a sign that a company does not have enough cash. Therefore, it is incapable of issuing cash dividends.

A stock split occurs when companies believe that the market price per share is preventing the investors to capitalize on them. If the market price per share of a company is too high compared to the value of its competitors, potential investors may disregard the company.

Reverse Stock Split

If corporations have the capacity to split up the number of shares outstanding, they can also merge it to a smaller total number and appreciate the value per share.

However, the consolidation of total shares will not affect the total value of shares outstanding. This process is called as a reverse stock split or stock consolidation. If five or ten existing shares of a corporation are merged into one share, it will be named as a 1-for-5 or 1-for-10 reverse stock split. The opposite of this corporate procedure is the stock dividend.

To illustrate this, let’s assume that an e-commerce company obtains 300,000 shares outstanding which trades for $40 per share. The board of directors decided to combine 10 current shares into a new share or a 1-for-10 reverse stock split. As a result, the number of shares outstanding of the corporation will shrink to 30,000 but will raise its market value per share to $400. 

The management suggests the reverse stock split which needs the approval of the shareholders. Even though the corporate value is not affected, this corporate procedure allows companies to deduct the number of shares outstanding due to several reasons.

Companies increase their value per share because of the rules of mutual funds and institutional investors about the minimum price of a stock. A company that is unsuccessful to be qualified for the acquisition of an important investor may impair its good name. 

In addition, companies are merging their total shares to acquire a higher price per share for them to be listed on an exchange. A minimum trading price is one of the listing requirements that must be met by the companies in order for them not to be de-listed. 

 

Dividend Stocks, Investing, Retirement

Income Investing: Alternative Dividend Policies

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Income Investing: Alternative Dividend Policies

In order to survive, companies always find ways to construct plans that will help to maintain their present condition. As these companies make some progress, they continually feel the need to give back to their shareholders in order to preserve their trust while continuing their business operations and pursuing other projects in the future. 

A dividend is a percentage of a company’s retained earnings that are distributed to the shareholders in a form of cash, shares of stock, or property. Every time a company earns largely for a year, the shareholders are being paid back by the company through disbursing dividends as a reward for investing in them.

Most companies pay cash dividends to the shareholders. Even though, the dividends are not distributed periodically. The board of directors decides the right time to pay back to the shareholders and the portion of the retained earnings that shall be appropriated for the dividend distribution. Their dividend decisions are influenced by different factors to consider such as the company’s outstanding debts, liquidity position, inflation, legal restrictions, and earnings stability. 

Dividend policy is the financial strategy that the board employs to build its dividend payout to shareholders. The concerns that are included in the dividend policy are the payment timing and the amount which are based on the long-term capability to earn and on the unappropriated retained earnings. The understanding of shareholders from the dividend policy is essential from the fact that the dividends to be received by them will be coming from the unappropriated retained earnings. 

This article aims to enumerate the year-to-year patterns on how companies construct the structure of their dividend payout and explain the rationale behind these. 

Constant Dividend Payout Ratio

Under this policy, it is specified that a fraction of retained earnings is constantly taken for dividend distribution every year. In short, the constant dividend payout ratio preserves the percentage of retained earnings distributed as dividends to the shareholders annually. Despite the stability of the dividend per earnings ratio, short term earnings’ volatility still affects the dividends. The amount of dividends expectedly varies every year as profits fluctuate. In spite of this, most of the companies do not use this policy. 

Constant dividend payout policy appears to be adaptable to weakening market status as the dividend per share directly changes as the earnings fluctuate. The policy does not manifest any disapproving indication from the fact that the dividend payout ratio is not volatile. As a result, investors can be enticed by the companies that use this policy. 

In this policy, the fairly steady dollar dividend is sustained every period despite the earnings’ volatility.  A specific amount is given per year as dividends which depends on the management. The amount per dividend will not fluctuate unless the board is persuaded by data that an increase in dividend payment will guarantee the maintenance of its value in the future. The dividend per share will not decrease as long as the management can still anticipate the longstanding strength of a current dividend. 

A stable dividend policy indicates a constant normal operation of a company and steadies the market value of shares. In addition, a company’s liquidity position gets better. As a result, it can meet the standards of the investors that are looking for stable dividends. The continuous dividend distribution is advantageous for investors. It strengthens the relationship between the shareholders and the company because the dividends have become a regular source of income. This policy is beneficial for retirement as the stable dividend distribution can be financial support to suffice someone’s daily necessities. 

Even with the advantages of applying a stable dividend payout, companies also face risks that can cause severe damages which explains the refusal of companies on its usage. The companies that frequently pay out dividends without considering their financial standing seem undesirable for potential investors. It will also result in the disposal of shareholders of their stocks.

Small, Regular Dividend Plus Year-End Extra Dividend Payout

Applying this dividend policy will let companies distribute dividends periodically and reward shareholders with year-end additional dividend during their successful times. This policy is different from regular paying dividend policies because extra dividends are announced unexpectedly. Most companies pay out large amounts of cash as an extra dividend that is why the board meticulously assesses the company’s condition to avoid complications in the future.

After evaluating the company’s profits for that year, the extra dividends will be declared at the end of the fiscal year. The reason why companies impose this policy is to prevent the implication of long-lasting dividends. Issuing extra dividends also indicates a good management strategy. Another purpose of paying out extra dividends is to prove to shareholders how successful the company is and that it will maintain its financial health over a long period of time which might result in gaining the confidence and loyalty of the investors for the company.  

The small regular dividend plus year-end extra dividend payout is applicable for cyclical companies that are largely affected by economic fluctuation. The profits of these companies are volatile. Therefore, there are times that dividend distributions are postponed due to losses or capital expenditures from other periods that they are still currently working out. Utilizing this policy has a drawback as well. It is a mistake for the companies to pay out extra dividends to its shareholders while erroneously expecting that they can support their future projects. Investors may perceive it as a bad corporate decision made by the board. 

The company might miss the chance to capitalize on new projects or facilities because it already had paid out extra dividends to the shareholders taken from the company’s cash. On the other hand, companies may seem to be inactive in making new projects because they are distributing extra dividends plus small regular dividends. A company must obtain reinvestment opportunities as well from the fact that growth is also an important concern for investors. 

Some investors do not prefer investing from companies that are exploiting the small regular dividend plus year-end extra dividend payout because of its unpredictability. These companies may look as if they prosper just because of some special incidents and not because of their efforts to stabilize their financial condition.  Companies exert every effort to disburse dividends consistently over the long-term future. Nonetheless, some instances require them to prioritize other aspects. 

Dividend Stocks, Investing

Pros and Cons of Discounted Cash Flow Valuation

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Pros and Cons of Discounted Cash Flow Valuation

Most investors care about one thing when it comes to choosing a company to put their investment: cash. The cash flow of a company is important for investors because it is the basis for the possible amount of money they are going to receive. For that reason, an appropriate approach has to be followed to devise a sensible investment decision. 

Discounted Cash Flow Valuation is a mathematical technique in gauging the appeal of an investment on a company based on its potential cash flows in the future. This evaluation method helps to determine the value of a company today which must be derived from the capability of a company to continuously generate cash stream in the coming years. Analysts exert efforts to construct projections on the financial performance of a company with the aim of weighing up its value. Aside from the individual investments, discounted cash flow valuation scrutinizes the projects that the investors or the company can maneuver. 

The present value of projected future cash flows requires a discount rate for discounted cash flows valuation. The company’s estimated present value is needed in order to thoroughly assess a possible investment. The potential investment could be taken into account once the present value computed using the discounted cash flows analysis is proven to be greater than the cost of the investment today.

The discounted cash flow valuation is advantageous for investors from the fact that the present value of a company can be used for them to estimate the future cash flows that an investment or a project can bring. Investors must consider not only the investment but also the ending value of pieces of equipment and other assets for them to accurately appraise the potential cash flows in performing the discounted cash flow valuation. 

But before you depend on this valuation method, we are going to discuss the advantages and disadvantages of using discounted cash flow valuation. This is for you to determine if this method is appropriate for the company and to assess the extent to which you can rely on this valuation method.

Discounted Cash Flow Advantages:

  • A Practical Instrument to Back Up Value Prices Issued by Analysts

There are a lot of aspects that influence discounted cash flow analysis such as profit margins and future sales growth. The valuation method takes account of the discount rate affected by the risk-free rate of interest. Discounted cash flow analysis regards the company’s cost of capital and potential risks to its share prices as essential steps from this valuation method. For you to estimate the company’s share price precisely, these factors cannot be overlooked because these will give ideas about the different elements that influence a company’s value. 

  • Dependability and Precision

According to corporate finance textbook authors Peter DeMarzo and Jonathan Berk, “the most accurate and reliable” valuation method for constructing a sensible investment decision is by using discounted cash flow analysis to decrease investments to net present value. Although some results on computing using this process are doubtful, there is no existing valuation technique that can be as reliable as the discounted cash flow analysis in assessing the investment which provides the greatest value for the company. 

  • Focuses on a Single Figure

One of the benefits of applying the discounted cash flow model is that it uses a particular value to represent an investment. This valuation method aids to rationally decide upon different investments. If the discounted cash flow model concluded a negative result, the company can have a possibility to incur losses due to the investment; if it leads to a positive outcome, the investment has the capability to bring successful cash inflow and can be considered by the company. The analyst shall forecast the cash flows from the investment, discount it to the present value, combine them all, and systematically weigh them up. The most lucrative choice is the one that has the greatest present value.

  • Reliability on Free Cash Flows

For investors, discounted cash flow analysis is the only valuation method that depends on free cash flows. Free cash flows are the cash of a company gained from its operation, decreased by the cost of expenditures on assets that is why it is a reliable measurement of money allotted to the investors. It is also a good basis of valuation because it disregards the independent accounting policies and manipulation of financial statements related to reported earnings. Free cash flow is essential for the discounted cash flow valuation since it helps to determine the companies that have high open costs that have a probability to impact earnings today but has the capability to escalate earnings eventually. In addition to that, free cash flow exposes the capacity of a company to satisfy its obligations, stabilize its growth, and distribute dividends. 

  • Validation Purposes

The discounted cash flow method is commonly used to easily assess whether the current share price is reasonable or not. As an alternative to approximating the intrinsic value, the current stock price is applied upon the discounted cash flow valuation model. By working in reverse, the valuation model will reveal if the company stock price is overvalued or undervalued. 

  • Business Strategy Construction

Other valuation techniques have limited data that restrain them from being exploited by devising business strategies. Investors can maximize the use of the discounted cash flow model by considering it as one of the bases for significant alterations to the business strategy.

Discounted Cash Flow Disadvantages:

  • Complexity 

The risk in employing the discounted cash flow model is deciding what cash flows to be discounted while the investment is complicated and substantial, or the unfamiliarity of the investors about the future cash flows. This valuation method is important for investors since it is based on cash flows offered for the new shareholders. A weak value is constantly implied when the method is based on the distributed dividends to a small group of shareholders.

  • If Widely Employed 

If the discounted cash flow is used excessively and outside its coverage, it may lead to unreliable presumptions. Continuously fluctuating amounts relevant to the valuation method may nullify the analysis once an investment or a project has commenced.

  • If Relevant Data are Inaccessible

As minority shareholders, they lack information about a company’s cash flows and projects needed to form assumptions for the discounted cash flow valuation since they don’t have any control from it. Therefore, this valuation method will not be beneficial for these investors. 

  • Susceptible to Appraisal Mistakes

The discounted cash flow valuation is a powerful instrument from the fact that it covers a broad range that covers the data for estimation. The model is prone to different kinds of errors. If estimated figures are fallacious, the net present value might be erroneous as well. Therefore, the model is impractical to use since it may cause an investor to form poor investing assessments and decisions. The valuation method is achieved by constructing forecasts. The cash flow of a company is required to be forecasted by an analyst. But that process cannot be attained only by just guessing because the data will be unreliable. The cash flow projection must still be based on significant pieces of evidence. In addition to that, the discount rate on the discounting formula must be estimated. The specific total cash changes periodically have to be presumed in order to get the discounted rate. 

If the discounted cash flow valuation is too complicated for the investors to understand and to maximize as a basis for their investment decisions, the method will not be significant. Hence, alternative techniques have to be utilized. But if you try to study the method with the help of qualified valuation accountants, you can thoroughly scrutinize companies for long-term investing. 

 

Economy, Investing, S&P 500, Stock Markets

Stock Markets: Q3 Earnings Season Update

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Stock Markets: Q3 Earnings Season Update

Uncertainties concerning the US and China trade negotiations remain an issue affecting business performance in the US. Out of this concern, the Fed cut interest rate in October 2019 by 0.25 percent. In terms of growth, the US GDP grew at a rate of 1.9 percent against a market expectation of 1.6 percent. The growth is a slight decline from 2.0 percent realized in Q2 of 2019. However, consumption by households grew to 2.9 percent while government spending increased by 2 percent.

The US economy performed better in Q3 compared to the rest of the world, as both the fixed income and equities earning were positive. Below are two highlights from the US third-quarter earnings results.

Stock Market Earnings Were Better Than Expected

Many analysts had expressed reservations regarding the third-quarter performance due to the current global economic slowdown and the China-US trade wars. The actual results from the Q3 period indicate that the markets have appreciated. An Increase in consumer spending resulted in a better than expected GDP for the third quarter

The S& P 500 is considered a good indicator of US stocks and business performance. To date, 91 percent of companies in the S&P 500 have reported their earnings. Seventy-three percent of these companies have reported better than expected per share. Historically, an average of 56 percent of companies usually achieves better than expected EPS. In terms of sales, 60 percent of the companies have reported figures above estimates, which is above the five-year average. The S&P 500 is on an uptrend throughout the third quarter. It gained 1.7 percent in that period. The index is now up by 20.9 percent in 2019; it’s the best-run since 1997.

Despite the positive earning, some analysts viewed the earning as a mixed bag. The aggregate net income for the companies that have reported so far is lower than in the net income of the same companies in previous periods. However, revenue growth is in a range previously achieved by this group of companies. For these companies, net income is down by 0.6 percent, while revenues are up by 4.9 percent.

US Economy Resilience to Tariffs and Wage Inflation

Trade wars between china and the US have seen the two countries impose steep tariffs upon each other. The depreciation of the Chinese Yuan countered a recent decision by the US to apply tariffs on more Chinese imports. The twists and turns that have characterized trade negotiations with China have not impacted the Q3 earnings significantly as initially feared. Although manufacturing dipped in Q3 2019, businesses still reported increased revenues.

For several months, the average hourly rate has been increasing steadily. While unemployment at its lowest level in decades, the wage rate is rising at a faster pace than inflation. For Q3, the annualized weekly wage rate rose to 3.3 percent. The rise was an improvement of a 2 percent increase in the second quarter. The increase in wages has not affected profits and earning to warrant a freeze on employment or layoffs.

Conclusion

In Q3, the earnings in the US appreciated. A Majority of companies forming the S&P 500 have reported a higher than expected EPS, better sales than the forecasts, or both. Businesses have proved resilience to rising wages, and the uncertainty brought about China and US trade wars.

Investing, Stock Markets

Enterprise Valuation Techniques: Determining a Company’s Total Worth

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Enterprise Valuation Techniques: Determining a Company’s Total Worth

The companies that have the potential to be successful entice investors to venture their capital to them. Although, a slothful evaluation with these robust companies always comes with a price. Investors must scrutinize thoroughly if these companies are worth buying for.

Company Valuation is an overall system of thoroughly appraising the economic value of an entire business. Company Valuation is used in order to estimate the fair market value of a business for several purposes. Aside from buying and selling shares, the process in determining an enterprise’s value is also beneficial in settling disagreements concerning taxation, distribution of business acquisition value with business assets, shareholder or partnership interests, and divorce proceedings. There are several useful techniques that can be utilized for company valuation depending on what aspect of that company you want to focus on such as: discounted cash flow valuation, times revenue method, market capitalization, liquidity valuation, valuation by share price, valuation by comparing companies, valuation through financial ratios, asset-based valuation, and earnings-multipliers.

Company valuation is a complicated financial evaluation that must be done by qualified valuation accountants awarded with a professional designation. This process will give aid especially to owners who are reaching a deal in selling their company and investors who are willing to buy a business. In this article, we are going to discuss the different methods in calculating an enterprise’s worth to raise awareness on how and why these methods are used. 

Discounted Cash Flow Valuation

Discounted Cash Flow is a method of appraising the worth of a company through forecasting its forthcoming cash flows. Through this valuation technique, sequences of assumptions are used in concluding cash flows forecasts regarding the potential performance of a company. Subsequently, the projected company performance will be interpreted to forecast the possible cash flow provided as a result of the operations of the company. 

This technique estimates the enterprise’s value by means of the Net Present Value method. NPV method is a contemporary way of assessing investment offers. This technique is based on the time value of money which estimates the return on investment by considering the factor of the time element. Using the NPV method, cash flows of the investment projected must be logically assumed. Correct discounts are recognized in the NPV method in order to mark down cash flows. For you to calculate the present value of cash flows, the opportunity cost must be considered as the discount rate.

Discounted Cash Flow has been used in most situations because it calculates the company’s value with accuracy. Therefore it is the most reliable valuation technique that exists today. Despite all of that, the DCF method also comes with some risks.

Why Discounted Cash Flow Should Be Analyzed

Valuation through the use of the Discounted Cash Flow method is beneficial for the owners since the cash of a company is what they are mainly concerned about. The DCF method help makes assumptions regarding the future cash flow to be generated by a company. Despite the affirmative earnings, a company that has unstable liquidity will not be attractive for investors since it is unable to pay off its obligations. 

Valuation Methods: Revenue Multiples

The Times Revenue method is a business valuation technique useful for estimating a company’s worth. For this method, the basis of verifying the highest value of a company is the multiple of the current revenue in which affected by a variety of factors such as the status of the industry in which the company belongs and its macroeconomic setting. Under this method, a company is valued on the range between 2 revenue multiples.

For example, a company that gained revenue worth $2 million for the current year is valued between 2x to 4x revenue. Therefore, it will have a total value of between $4 million to $8 million. 

Why Revenue Multiples Should Be Analyzed

The Times Revenue method may appear for some as an unreliable valuation technique in determining the current value of a company. The reason behind the doubt in using this method is that the continuous revenue growth does not indicate profitability growth. Despite its undependability, this method is advantageous for financial analysis in which the revenue is used as an independent variable and its limitations are manageable for complex analysis purposes. Thus, the Times Revenue method is still favorable for buyers because it estimates the purchase price offered by them.

Market Capitalization

Market Capitalization is the most uncomplicated and the easiest method you can understand since this determines the worth of a company based on the total value of all the company’s stocks. This technique is used in estimating a company’s value by simply multiplying the company’s number of outstanding shares to the price per share. For instance, a company is selling 100,000 outstanding shares for $50 per share. Therefore, the company could be appraised at $5 million.

Why Market Capitalization Should Be Analyzed

If you want to compare companies, this valuation method will be reliable in evaluating their relative size because it measures its value on the open market. In addition, it allows predicting its potential growth in the future and helps to determine risks in obtaining which makes the method a dependable basis for investors who are interested in buying shares of stock. 

Risks Using Market Capitalization

Although the Market capitalization is the simplest method, this is not the most effective way to appraise a company’s value because the share price is only based on the declared value in which the real value of the company may not be considered. Your evaluation of business might be put in jeopardy if you rely exclusively on this valuation technique. These are the reasons why depending on the Market Capitalization alone will bring uncertain company valuation results:

  1. The share price is constructed through the foreseeable positive outcome of an upcoming set of products of a company. These newly-launched products might end up as a failure and will result in a decrease in the share price.
  2. The share price might be based on an inaccurate forecast about the development of the company. The mistakes on the company’s projection might be the result of taking it as an insignificant part of the valuation. 
  3. The share price is based on the historical growth in which the company expects to continue. Using solely the past development of a company is a slothful way of estimating a company’s value.
  4. The share price is being relied on news reports or rumors that are unnecessary in completing the company valuation. 
  5. The share price is irrelevant to the company’s value if it is being traded inactively. 

Liquidation Value

Liquidation Value is a way of measuring the value of a company once it is bankrupt or shutting down its business. An enterprise’s worth is determined using this valuation technique by getting the amount of its cash after selling off all its assets and settling all its obligations. However, Liquidation Value is against the going concern principle which is about the presumption that a business has to continue its operation for the foreseeable future or at least 12 months.

Why Liquidation Value Should Be Analyzed

If a company is projected or planning to wind up in a span of 12 months, the Liquid Valuation is a reliable and acceptable method from the fact that it does not violate the going concern principle. 

Company Stock Comparisons

Comparing companies within the same industry is one of the useful techniques in measuring a company’s value. Considering the share price of the companies sold before is an effective way to estimate your price per share. On the other hand, applying this company valuation method also has drawbacks:

  1. You may find comparing indistinguishable companies complicated from the fact that modification on the calculations has to be done in order to identify their distinctions.
  2. The sales of a company are not equivalent to another company.
  3. The sales report of the companies has to be up to date in order for the current fair market value to be concluded.

Share Prices and Financial Ratios 

The shares undervalued by the market are attractive for value investors. They are executing this kind of game plan because they think that the underpriced valuation of the market is its exaggerated response from either good or bad news. Therefore, companies trade their shares less than intrinsic or book value. The underestimated shares by the market give value investors an opportunity to buy the shares of a company because of the shares’ future earnings power. Here are the practical financial ratios that will provide aid for company valuation:

  1. Price-Earnings Ratio – This ratio reveals the link between the fair market value per share and the earnings per share. It is also known as the Earnings- Multiplier method. Since a company’s profit is a more precise basis of financial performance than sales revenue, this method is frequently used to get the exact company value than the Times Revenue method. It is calculated as market value divided by the earnings per share.
  2. Price-Book Value Ratio – This ratio reflects the relationship between the market value and the book value per share. It is computed as market value divided by the book value per share.
  3. Price-Sales Ratio – The price to sales ratio determines the percentage appraised by the company per dollar of the sales. It is computed as market capitalization (or the number of outstanding shares multiplied by the price per share) divided by the total sales over the past 12 months. 
  4. Price-Cash flow Ratio – This ratio measures the correlation between the market value per share and the generated cash flow. To calculate the ratio, get the company’s market capitalization and divide it by the operating cash flow for the past 12 months. 
  5. Price/Earnings-Growth (PEG) Ratio – The PEG ratio finds out the proportion between the Price/Earnings Ratio and the projected earnings growth of a company for the given years. To get the ratio, take the Price-per-Earnings ratio and divide it by the expected earnings-per-share growth. 

Asset-Based Valuation Using the Going Concern Approach

Just like the Liquidation Value, this method uses a simple formula in order to get the value of a company. The only difference is that the going concern approach supposed that the company will continue its operation without being at risk of liquidation. This method calculates the fair market value of the total assets including intangible assets such as trademarks and patents. 

However, the way how intangible assets are being measured is different from the valuation of the other assets. The value of marketable securities already has a determined fixed value. The intangible assets are appraised under the discretion of the company which might result in overvaluation.  The techniques mentioned are the commonly-used company valuation method in the present day. These methods are known from their dependability towards precise valuation. The methods that are also useful include breakup value, replacement value, and a lot more.

 

Dividend Stocks, Investing, Retirement

Stock Trading Strategy: Appropriation of Retained Earnings

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Stock Trading Strategy: Appropriation of Retained Earnings

After a successful performance of a corporation, the shareholders are expecting to receive something in return from their capital contribution. However, the board of directors will still discuss if it is the right time to distribute the retained earnings through dividends. Some corporations are still facing problems that hinder them to repay their shareholders. But some are just establishing their priorities in order to fuel their expansion. If the board decided not to pay out dividends or will distribute only a part of the profits, a portion of the retained earnings will be appropriated for a specific purpose. These are the commonly created appropriations:

Appropriation for Contingencies

Corporations allocate their retained earnings to reserve their resources if in case they fail on a pending lawsuit which will result in charges to be incurred. The amount of the liability to be charged on a company regarding a lawsuit is uncertain. A corporation that is unprepared for future losses might end up struggling with bigger problems. Therefore, it is a sensible decision for the board of directors to designate a portion of its retained earnings for emergency purposes. 

Appropriation for Plant Expansion

If a corporation has decided to acquire land and build plant facilities, it will surely allocate its retained earnings for such a project. As a project concerning plant expansion continues, a substantial amount of expenses will persist to be incurred to the company as time goes by. Thus, the designation of the retained earnings is reasonable since this is for the benefit of all the shareholders in the future. 

The appropriation for contingencies and plant expansion is called voluntary appropriations because these are established by the board of directors at the same time permitted by the shareholders.

Appropriation for Bonds and Stock Redemption

Retained earnings are often reserved with the intention of guaranteeing the disbursement for the bonds or redemption of the stocks. This retained earnings allocation is also known as contractual appropriation.

Appropriation Reserve for Treasury Shares

If a corporation is planning to reacquire outstanding shares from its shareholders, it will retain its profits instead of giving it out through dividends. Since it is covered by the law, the appropriation is also called as legal appropriations.

For readers to get the point of view of the corporation, an example is cited below:

Company XYZ has obtained retained earnings of $4 million. The board has appropriated an amount of $1.5 million from the retained earnings with the purpose of building plant facilities which the shareholders approved. The journal entry for the appropriation is recorded as follows:

Retained Earnings  1,500,000

   Appropriation for Plant Expansion 1,500,000

The appropriation for plant expansion is still a retained earnings account but it will not be taken for the payment of dividends. As a result, the unappropriated retained earnings worth $2.5 million is the maximum amount available for paying out dividends. 

Once the goal in appropriating the retained earnings has already been achieved, the appropriation can now return as unappropriated retained earnings. As a result, it can be used to distribute dividends or appropriate it again for some other purpose. A journal entry using the foregoing example will be prepared as:

Appropriation for Plant Expansion 1,500,000

    Retained Earnings  1,500,000

Aside from distributing dividends, corporations will not restrict a portion of their retained earnings for the intention of supporting their regular operations. The appropriations will be reflected in the statement of retained earnings in order to maintain the trust of the shareholders since some are skeptical that the appropriated amount might go to the pockets of the board of directors. 

 

Dividend Stocks, Investing, Retirement

Income Investing: The Dividend Distribution Process

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Income Investing: The Dividend Distribution Process

A thriving corporation never forgets to keep on looking back on its stakeholders who contributed to their successful performance. Once they secured their financial position and came upon a decision with respect to the dividend policy, corporations usually pay out dividends to their investors as their way of giving back. This process progresses gradually in order to give time for the deliberation of the Board of Directors and for the shareholders’ documentation. 

We are going to tackle the dividend payment procedures, the essential dividend dates that must be considered, and who is entitled to claim the dividend payments. To be included here are the accounting journal entries in order to present the corporate perspective to every dividend payment stage. This article will be beneficial especially for the investors that are just starting out. 

Date of Declaration

This is the date on which the dividend payment is formally confirmed and announced by the Board of Directors. The board has finally decided what type of dividend will be distributed, the dividend size, and the date of payment. This date is also known as the “announcement date”. This is a date of which option holders must let the corporation know if they want to use their right to the option. During this date, the liability to pay out dividends to the shareholders is acknowledged on the books using this journal entry:

Retained Earnings     xxx

     Dividend Payable     xxx

In this journal entry, we debited retained earnings since the dividend to be paid out will be taken from the profit appropriated by the corporation. Dividend payable has been credited because of the corporation’s liability from its shareholders. 

Date of Record

During the date of record, the corporation indicates the shareholders who will be eligible for the dividend payment. The stock and transfer books are to be closed on this date only to complete the shareholder list for the entitlement of the subsequent dividend payment. Therefore, a journal entry for this date is not necessary. In order to use as a source in indicating the eligibility of the shareholders for the dividend payment, a fixed date must be set since stocks are effortlessly transferable.

Ex-Dividend Date

This is a time on which the right of ownership to the dividends is homogeneously dismissed by the stock brokerage four days before the date of record. It is done in order to prevent the recording of the eligible shareholders last-minute prior to the date of record. Thus, stocks transferred subsequent to the ex-dividend date will be automatically listed out from the list of shareholders entitled to the dividend payment. There is also no required journal entry for this date. 

Date of Distribution

This is a date of which shareholders will receive the dividend payment. If a cash dividend is distributed, the corporation will mail the dividend check to every eligible shareholder. This date is also called as “Payment Date”. The journal entry to be recorded for the dividend payment will be:

Dividend Payable     xxx

   Cash, Property, or Share Capital  xxx

Since the liability has been satisfied, the dividend payable is debited. While cash, property, or share capital is credited due to the distribution of the dividends. 

In order to further elaborate the dividend payment process, an example is provided below:

The board of Bank of America Corp. has formally declared dividends worth $0.18 on a quarterly basis last October 22, 2019. It has been announced that the corporation has completed the list of shareholders eligible for dividends last December 6, 2019.  To finalize the qualified shareholder list on the date of record, the ex-dividend is set on December 5, 2019. At last, Bank of America Corp. will issue dividends to the qualified shareholders on December 27, 2019. The dates are illustrated below:

Date of Declaration: October 22, 2019

Date of Record: December 6, 2019

Ex-dividend Date: December 5, 2019

Date of Distribution: December 27, 2019

 

Dividend Stocks, Investing, Options

What’s The Difference Between Cash Dividends And Stock Dividends?

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What Are The Differences Between Cash Dividends And Stock Dividends?

A dividend is the distributed profit by a corporation to its shareholders. This is how corporations give back to their investors as they contributed capital to its successful performance, and maintain a good rapport between them. Periodically, a corporation pays dividends with an amount that depends on each shareholder’s investment to the company. The decision in allocating a portion of retained earnings is developed by the Board of Trustees. The management shall agree to a decision if there must be an appropriated budget for the dividend payment or what kind of dividends shall be distributed.

Most corporations usually issue two types of dividends: cash dividends and stock dividends. Therefore, investors must familiarize themselves with these types of dividends because they will surely encounter both in the future. In this article, we are going to specify the distinctions on every aspect of these dividends in order to bring awareness of why corporations pay a particular dividend. Consequently, this will eventually help you utilize the knowledge to your advantage towards a successful investment experience.

What are Cash Dividends and Stock Dividends?

A cash dividend is a regular payment in the form of money taken from the retained earnings of the company. Normally, cash dividends are distributed quarterly after prioritizing the payment for the company’s outstanding debts. 

A stock dividend, which is also called as scrip dividend, is an allocation of a company’s additional shares originating from unissued shares. This type of dividend is being distributed instead of paying cash dividends to the shareholders if the company’s liquidity is low. Companies distribute stock dividends in order to repay their shareholders without spending cash. Therefore, companies are able to retain their assets and appropriate them for expansion purposes. 

Stock Market Calculations

The amount of cash dividend to be given on a shareholder is different from another shareholder depending on their number of shares since it is issued on a per-share basis. For example, if the Board of Directors declared $20 per share, an investor that owns 10,000 shares will receive $200,000 worth of cash dividend. Even if the cash dividend is stated at a specific percentage, the result will always be the same. Let’s say 10% is issued as a dividend on a $200 par value per share. The investor on the preceding example will still get the same amount of $200,000. 

The amount of cash dividend that investors will periodically acquire depends on how many times the company will issue annually. Using the previous example, the company pays cash dividends quarterly. Therefore, shareholders will receive $5 per share every 3 months. 

With the allocation of stock dividends, the retained earnings are being capitalized while shareholder’s equity stays unchanged before and after its declaration and distribution. The allotment of the stock dividend only expands the number of shares but does not affect the benefits nor the ownership of its shareholders. For instance, a corporation that has 300,000 shares declares a 20% stock dividend. As a result, a shareholder that possesses 3,000 shares from that corporation will gain 600 more shares. The shareholder that owns 10% from the shareholder’s equity will maintain its portion from it after earning a 20% stock dividend and the market price of the stock remains the same. 

A small stock dividend considers the distribution of additional shares of less than 25% chargeable to retained earnings at the market value. While the additional share of 25% is considered as a large stock dividend that must be charged at the par value. 

Advantages of Cash and Stock Dividend Acquisitions

Obtaining cash dividends will benefit investors whose goal is to earn cash regularly. Cash dividend-paying companies are obliged to pay cash to their shareholders regardless of the companies’ financial status. Therefore, investors must carefully pick the cash-dividend paying companies to invest in for them to ensure a permanent source of passive income. 

Through cash dividend, investors are also given the freedom not only to spend it for personal use, but they can also buy more shares from the same company and buy shares to another company concurrently. Shareholders who are willing to reinvest their cash dividend must undergo on a dividend reinvestment plan. Buying more shares is a wise way to earn more money in the future if you believe that the company and economy have the potential to grow. 

The advantage of gaining stock dividends instead of the cash dividend is that investors will not incur tax from its acquisition. However, receiving a stock dividend with a cash dividend option included is subject to tax. Investors can sell their stock dividends in exchange for cash. Due to the sale of the stock dividend, it will not be exempted from tax anymore.

Disadvantages of Cash and Stock Dividend Acquisitions

The liabilities of a company increase because it is paying out cash dividends to its shareholders. The companies that distribute cash dividends may either have enough cash flow to support its growth or just feel obliged to give back to its shareholders in order to gain their trust. If a company still pays out cash dividends while still having losses and outstanding debt, that’s already a sign of its financial instability. Instead of distributing cash dividends, companies could have allocated their cash for expansion purposes which may result in market price appreciation. Aside from that, the cash dividends earned by shareholders are subject to tax based on the amount received. 

Stock dividends don’t have any value for investors who are expecting cash from the company they capitalized on. For that reason, they are pressured to sell it even for an amount lower than the dividend’s market price. In addition to that, shareholders will incur costs and taxes from selling their stock dividends. 

Reasons Companies Issue Dividends

Cash dividends are issued by companies because they already obtained ample earnings. It is predicted that giving back to their shareholders will not affect long-term financial strength. These cash-dividend paying companies pay out cash because they might have a good financial position but has a limited capability to venture on expansion to spend their cash up.  Companies tend to issue stock dividends to their shareholders when it is not yet the right time to exhaust assets just to repay shareholders. These stock-dividend paying companies are just taking safety measures because they don’t want to inflict any harm to their liquidity.