What is Discounted Cash Flow Analysis (DCA)?

Discounted Cash Flow Analysis or DCA is one of the best methods to estimate the worth of an investment. In DCA, the value of an investment is determined by the sum of its future cash flows discounted back to present value at an appropriate discount rate or a required rate of return for the investor.

What is the Discounted Cashflow Model (DDM)?

For dividend paying stocks, the type of cash flow used in the analysis is the stock’s regular dividend payments and the Dividend Discount Model (DDM) Cash Flow Analysis is used to determine the Intrinsic Value of the stock.

There are 2 types of future cash flows which determine the Intrinsic Value of a Dividend Stock:

• • Future regular dividend payments over the Holding Period

• • Expected Future Stock Price at the end of the holding period
    • • Depending on whether there is capital appreciation in the stock price over the holding period, this cashflow can either add or substract from the Intrinsic Value of the stock.

These two cash flow components, when discounted back to the present value at the appropriate discount rate, determine the Intrinsic Value of the Dividend Stock.

Introduction

In a previous article, I laid out the reasons why I added the H-share of the Bank of China (BOC) to my dividend income portfolio. In the same article I also described the discounted cash flow analysis which I used to estimate the intrinsic value of Bank of China (BOC) H-share, which worked out to be 4.207HK$ per share.

Not long after the article was posted on my blog, I came across a piece of news article on AAStocks.com which provided a summary of the latest Brokers' Recommendations and Target Prices for Bank of China H-share (3988.HK).

Summary

In this article, I examine the stock valuation of the H-share of Bank of China (BOC 3988.HK) through the eyes of a Dividend Investor. Dividend Cash Flow analysis was used to evaluate Bank of China's H-share (BOC 3988.HK). The Dividend Discount Model was employed to calculate the H-share Intrinsic Value, Expected Return on Investment, and its Margin of Safety.
Continue reading to learn more.

Introduction

Following my previous article on the H-shares of the Industrial and Commercial Bank of China (ICBC), I also recently purchased the H-shares of the Bank of China (BOC). Here, I would like to discuss the rationale behind the investment decision to add the H-shares of BOC for my dividend income portfolio.

Over the years, my approach to investing has evolved from the speculative growth and momentum style to a more conservative method, preferring stocks which provide attractive dividend income streams at inexpensive valuations. I used the following set of questions to help determine the investment worthiness of the H-share of the Bank of China (BOC):

• • Does the Bank of China (BOC) have a good long-term dividend track record?

• • Does the Bank of China (BOC) currently offer an attractive dividend yield (above the average yield of Hang Seng Index constituents)?

• • Is the current payout ratio of the Bank of China (BOC) sustainable?

• • What is the expected return on investment of the Bank of China (BOC) over a 10-year period? Majority of recommendations by financial analysts tend to have a 12 month time horizon. I find the 10-year period to be more suitable for a dividend income stock, especially one which is part of a retirement dividend income portfolio.

• • Does the H-share of the Bank of China (BOC) offer a sufficient margin of safety to the intrinsic value of the stock?

• • Are the H-shares of the Bank of China (BOC) considered attractive when measured against the traditional value investing yardsticks? A good dividend stock with inexpensive valuation will minimize the risk of capital impairment and increase the probability of capital gains.

With the above questions in mind, let us delve into the analysis of the Bank of China (BOC) to find the answers.

Introduction

In a previous article, I laid out the reasons why I added the H-share of the Industrial and Commercial Bank of China (ICBC) to my dividend income portfolio. In the same article I also described the discounted cash flow analysis which I used to estimate the intrinsic value of ICBC H-share, which worked out to be 5.83HK$ per share.

Not long after the article was posted on my blog, I came across a piece of news article on AAStocks.com which provided a summary of the latest Brokers' Recommendations and Target Prices for ICBC H-share (1398.HK).

Summary

In this article, I examine the stock valuation of the H-share of the Industrial and Commercial Bank of China (ICBC 1398.HK) through the eyes of a Dividend Investor. Dividend Cash Flow analysis was used to evaluate ICBC's H-share (1398.HK). The Dividend Discount Model was employed to calculate the H-share Intrinsic Value, Expected Return on Investment, and its Margin of Safety.
Continue reading to learn more.

Introduction

In a previous article, I looked at certain China H-shares as good investment candidates for dividend income. Since then, I have invested in some of the same companies discussed in that article, including the H-share of the Industrial and Commercial Bank of China (ICBC). Here, I would like to discuss the rationale behind the investment decision to purchase the H-shares of ICBC for my dividend income portfolio.

Over the years, my approach to investing has evolved from the speculative growth and momentum style to a more conservative method, preferring stocks that provide attractive dividend income streams at inexpensive valuations. I used the following set of questions to help me determine the investment worthiness of the H-share of ICBC:

• • Does ICBC have a good long-term dividend track record?

• • Does ICBC currently offer an attractive dividend yield (above the average yield of Hang Seng Index constituents)?

• • Is the current payout ratio of ICBC sustainable?

• • What is the expected return on investment of ICBC over a 10-year period? The majority of recommendations by financial analysts tend to have a 12-month time horizon. I find the 10-year period to be more suitable for a dividend income stock, especially one which is part of a retirement dividend income portfolio.

• • Does the H-share of ICBC offer a sufficient margin of safety to the intrinsic value of the stock?

• • Are the H-shares of ICBC considered inexpensive when measured according to traditional value investing yardsticks? A good dividend stock with an inexpensive valuation will minimize the risk of capital impairment and increase the probability of capital gains.

With the above questions in mind, let us delve into the analysis of ICBC H-share to find the answers.

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