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Support Ticket 77 - Section 4 of the SSG in Toolkit 6
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The questions on section 4 are pretty slim. This would be a good one to comment on, if you're reading these notes in order, and have any questions.
Explanation of "Price Dividend Will Support"
“Price Dividend Will Support” is meant to select a potential future low price for the stock. The idea is that if the stock’s yield approaches historically high levels, investors who seek income will become more interested in the company and thus prevent the stock from dropping past a certain low price (the lower the price, the higher the yield as long as the company doesn't cut the dividend).
Since "Price Dividend Will Support" is calculated by dividing the Present Dividend (for the entire year) by the stock’s high yield, it is only relevant for high yielding stocks. The price obtained in this section is one where people who buy primarily for yield are likely to come into the market, and their buying is likely to support the stock at about that price.
Keep in mind that the low price the dividend will support is only a valid selection when the yield is substantial, such as when (as a low price) it is still higher than [Projected Future Low P/E Ratio] multiplied by [Estimated Future Low EPS].
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Rank: Advanced Member
Posts: 105
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Note that "Price Dividend Will Support" can be highly overstated for a company that only recently started paying a dividend.
Apple is a good example of this now (August 2013). Apple started paying a dividend near the end of FY 2012. Because of this the entire SSG section 3 annual dividend for FY 2012 is $2.65, since only one quarterly dividend was paid that year. Based on a FY 2012 low price of $354.2 that produces an 0.7% high yield (2.65 / 354.2 = 0.7482%).
Apple's current quarterly dividend is $3.05 so the current annualized dividend is 3.05 x 4 = $12.20. (Don't know why the data feed shows it as $12.22!) So, Price Dividend Will Support becomes 12.22 / 0.007482 = 1,633.3 which is more than three times the current price.
Why the overstated value? Because that 0.7% high yield in FY 2012 isn't based on an annual dividend (since Apple started paying a dividend late in that FY). Based on an annualized FY 2012 dividend of 2.65 x 4 = $10.60 the high yield would be just under 3.0% and the Price Dividend Will Support would be about $408 (one quarter of the value currently shown on the SSG).
The non-annualized 2012 Apple dividend also causes the SSG section 3 % Payout to be understated which, in turn, causes the SSG section 5 Avg Yields to be understated.
-Jim Thomas
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Support Ticket 77 - Section 4 of the SSG in Toolkit 6
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