8.13  Application IBM Step 4:  Estimating Normal Growth

We will use 4.5% for the stage 2 normal growth estimate as a conservative long term average growth rate for IBM.  This number can be justified from long term macroeconomic data for the US economy  (See chapter 4 or chapter 5):

The one plus the long term nominal growth in the US is around  1.018*1.03 = 1.04854. 

As a result, to be conservative we will round down and use as an upper bound for economy wide growth for US stocks to be 4.5%. 

Current Summary of Key Inputs for IBM:

Book Value per Share = Total Shareholders’ Equity/(Shares issued – Treasury Stock) = 22.637/1.341 = $16.881 equals the book value per share.

Dividend per Share = Dividends/(Shares issued – Treasury Stock) = 2,860/1341 = $2.132 equals the dividend per share.

Dividend Payout Ratio (Relative to Comprehensive Earnings) = 2860/10115 = 0.283

Comprehensive Earnings per share 2009 = $10,115/1341 = $7.543

Comprehensive EPS FY 2010  $7.543*1.1255 = $8.49

Comprehensive EPS FY 2011  $8.49*1.094 = $9.288

5-Year Growth = 0.1043

Normal Growth = 0.045

Projected Dividend per Share (Next Year) = $8.49*0.283 = $2.403

Years in Stage 1 Growth:  5-years

We next turn our attention to the discount rate – that is assessing IBM’s Cost of Equity Capital.