RE:RE:RE:artis versus hr
Frankie10 wrote: All great points. I would however disagree with your last point regarding cost of equity implied by dividend yield. For the same reason you illustrate above regarding valuation - you cannot look to the distribution/dividend given it is descretionary in nature - you should look to the underlying of the dividend which is FCF. Same with cost of equity - no Valuator should use dividend yield as proxy for cost of equity. When determining cost of equity, one should look to enterprise risk and total expected return to equity owners. For example, Google's cost of equity is not nil, and Dream Office's cost of equity has not been reduced along with its "dividend cut".
I'm just using a simple Gordon Discount model to determine the cost of equity.
You should never look at dividend in isolation without looking at its affo. Still, the Gordon model suggests that the cost of equity is equal to the dividend yield plus the growth rate in dividends in future years.
For example, if dividends grow at the expected inflation rate of 2% and the distribution yield is 10%,
then we have,
Cost of equity = 10% + 2% = 12%
https://en.m.wikipedia.org/wiki/Dividend_discount_model
You can work backwards too.
P = D1/ (r-g)
r = cost of equity
g = growth rate in dividends
D1= dividends
P = D1/(12% - 2%)
P* (10%) = D1
10% = D1/P
In other words, the dividend is 10% of the stock price.