Question

Question [13 Marks]
Goble has been going through a difficult financial period. Over the past three years, its stock price has dropped from R50 to R18 per share. Throughout this downturn, Goble has managed to pay a R1 dividend each year. Management feels the worst is over but intends to maintain the R1 dividend for three more years, after which they plan to increase it by 6% per year indefinitely. Comparable stocks are returning 11%.
Required
1. If these projections are accurate, is Goble stock a good buy at R18? [10]
2. How do you think the market feels about Goble’s management? [3]

Answer 1

Using 11% as discount rate and dividend discount model, the current price should be :

Current Price = 1/(1+11%) +1/(1+11%)² + 1/(1+11%)³ + [(1/(11%-6%)]/(1+11%)³ = 17.07

Hence this is not a good investment at R18

Given that the company has turned around but the dividend rate has not been changed, it gives a feeling (signalling effect of dividend) that the company is still unsure of the turnaround or is not fully confident of the same. This possibly will make the market also skeptical.