## Monday, October 1, 2007

### 20-Year DCF Price

Price calculated by taking the Net Present Value (NPV) of the next 20 years of dividends and the estimated value of the stock at the end of 20 years. [Top]

### Avg. High Yield Price

Price calculated by dividing current dividend per share by the average high dividend yield price for each of the last 5-years (dividend per share divided by the year’s low share price). [Top]

### Avg. P/E Price

Price calculated by multiplying the EPS (trailing twelve months) times the minimum of: 1.) 5-year average of high and low P/Es or 2.) Last years high P/E. [Top]

### Debt To Total Capital

To gauge how levered a company is, the metric I like to look at is debt to total capital. Debt includes both long-term and short-term debt and is readily available on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital a desirable rate is something less than 35%, but I will consider rates up to 50% on a short-term basis. [Top]

### Dividend Growth Rate

The dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history. To see a sample calculation please refer to the D4L-PreScreen.xls model. [Top]

The Mid-2 Price and the NPV MMA Price are used in calculating the Fair Value Buy Price. Depending on where we are in the cycle one of the four options is used:

Option: 1 = The lower of the Mid-2 price or the NPV MMA price.
Option: 2 = Lesser of the Mid-2 price or NPV MMA price + lower of 10% increase or 25% of the difference between Mid-2 price and NPV MMA price.
Option: 3 = same as Option: 2 except + lower of 20% increase or 50% of the difference.
Option: 4 = same as Option: 2 except + lower of 30% increase or 75% of the difference.
Option: 5 = Weighted: 25% Mid-2 price + 75% NPV MMA price.
Option: 6 = The higher of the Mid-2 price or the NPV MMA price.

The more stocks are overpriced, the higher the option. The option I am currently using is listed on the back of Analytical PDF Reports under "Fair Value Buy Price".[Top]

### Graham Number

Price calculated by taking the square root of 22.5 times the tangible book value per share times EPS (lower of trailing twelve months or average last 3 years). Benjamin Graham, Warren Buffett's mentor and the father of value investing, developed rules for the defensively screening stocks. This formula uses his principles to calculate the "maximum" price one should pay for the stock. He believed, as a rule of thumb, the product of P/E ratio and price-to-book should not be more than 22.5 (P/E ratio of 15 x price-to-book value of 1.5). The 15 P/E was a result of Graham wanting his portfolio to have a yield equal yield to that of a AA bond (back then around 7.5%). The inverse of this yield is 1 divided by 7.5%. That works out to 13.3; he rounded up to 15. [Top]

### Mid-2 Price

The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. [Top]

### NPV MMA Price

The price where the NPV MMA value equals the NPV MMA target. The basis of NPV MMA value calculation is a hypothetical \$1,000 investment in the subject stock and a Money Market Account (MMA) earning a 20 year average rate (I use a 20 year Treasury as a proxy). The value calculated is the net present value (NPV) of the difference between the annual dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at a historically calculated rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. The NPV MMA target is determined based on the number of consecutive years of dividend increases. The formula is: Target = Base – (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years of dividend growth yields a \$3,500 target and 30 years of growth yields a \$500 target. The D4L-PreScreen.xls model can be used to calculate this number. [Top]

### Tangible Book Value

Book value is assets less liabilities (or equity). Tangible book value is Book Value less Intangible Assets (Goodwill, Patents, Tradenames, etc.) If the intangible assets are greater than the book value, this would generate a negative tangible book value, which would not be meaningful in the Graham Number calculation.[Top]