Vodafone Plc: Dividend Discount Model and CAPM Analysis Case Study

Vodafone Plc: Dividend Discount Model and CAPM Analysis

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Introduction: Vodafone Plc: Dividend Discount Model and CAPM Analysis

The main aspects of this report shall be considered for ascertaining the overall relevance and significance of investment strategy and management applicable for an organisation especially concerning dividends that are needed to be facilitated in favour of shareholders. Primary importance of this assignment shall be offered for considering a brief rationale selected for the chosen company and dividend discounting model that is being contemplated. The selected company for this assignment is considered to be Vodafone and its main operational background is related with Production and Manufacturing of telecommunication products and services. Further discussion on the assignment salary offered for determining suitability of dividend discount model applicable for Vodafone as well as main methods associated for estimating dividend growth rate and providing a calculation of dividend growth rate computation.

Further details of this assignment will be offered for considering calculations for Capital Asset pricing module method as well as regression method. A comprehensive and detailed discussion on the results obtained for both the methods shall be considered and outlined in this assignment. Calculation of intrinsic values, its detailed analysis and overview as well as critical discussion of dividend discount model along with Capital Asset pricing model will also be contemplated as key necessities in this assignment.

Rationale for company chosen and DDM selected

The company chosen for the conduct of this investment-oriented exercise is considered to be Vodafone Plc. This company has been selected on the basis of possessing higher market credibility to generate lump sum revenue as well as profitability from operations and sale of telecommunication products and services. Rationale chosen for selecting this company is considered to be associated with closely monitoring the dividend propositions that are being facilitated. The usage and application of dividend discounting model shall also be integrated comprehensively in order to assess how current stock price of Vodafone is influenced due to previous or historical dividend payments that are being made in favour of investors.

Brief description of the chosen company’s profile

The company concerned Vodafone Plc is mainly headquartered in London and its core operational area is associated with the Telecommunications as well as the networking industry of UK. The company profile for Vodafone can be further ascertained on the basis of considering overall net profit generated in the financial year of 2022. The numerical aspects of net profit generated in 2022 by Vodafone is expressed as GBP 2,624 million (investors.vodafone.com, 2023). The additional attributes that could be associated with determining the description of the company profile for Vodafone is considered to be associated with availability of overall Global Business dominance opportunities. Vodafone is also considered to be a major player in the telecommunications segment, its global business image is highly influential and dynamic in comparison to other existing industry competitors.

The suitability of DDM for the chosen company

The availability of Dividend discount model for the chosen company Vodafone can be associated with considering 3 subparts of dividend that are mainly facilitated. These subparts mainly include dividend growth, transition and maturity and hence is considered to be applicable for the organisation concerned Vodafone Plc as dividend growth is progressive over a period of ten years. As per statements and illustrations of Ichkitidze et al. (2022), applicability and suitability of the dividend discount model is further considered to be appropriate in order to establish overall prospects of dividend payout that is being contemplated. The contemplation of dividend payout ratio for Vodafone is considered to be an important and significant requirement that is being necessitated time and again in order to attract better investor harmony and orientation.

Justification of decision on the number of stages of dividend growth

The three stages of dividend growth are mainly considered to be identified as initial growth, stable growth and decline. In the context of ascertaining dividend performances for Vodafone, all three stages contain a higher level of influence and significance in order to develop overall investor relations. Justification for implementation of decision to encourage initial growth is considered to be related with identifying how investor influx has Increased due to increase in dividend paid (Lu et al., 2021). Decision-making associated with constant and stable dividend growth is considered to be associated with determining how future investments can be propelled through stagnant available dividends. justification of decision relating to declining dividend growth is mainly considered to be associated with determining how declining dividend have affected the overall performance of dividend growth for Vodafone Plc.

Details of determining dividend growth rates

The details of determining dividend growth rate are also considered to be an important aspect for the company concerned, Vodafone Plc, to establish how dividend growth rate is needed to be calculated in order to facilitate assessment of increase or decrease. As per illustrations and explanations of Bask (2020), dividend growth rate can be calculated mostly by two methods, which mainly include the arithmetic progression method as well as statistical method. Following is a detailed discussion and overview of both these methods as well as the workings facilitated in order to ascertain computation of dividend growth rate for Vodafone Plc beyond 2022.

Method of estimating dividend growth rates

The main methods of estimating dividend growth rates are considered to be associated with either employing arithmetic progression method or the statistical method. Michaud (2023), stated and viewed that the Arithmetic progression method is considered to be a beneficial and useful method especially for ascertaining present value of dividends in conjunction with historical dividend values available. This method is further integrated by following the compounding technique in order to forecast and speculate future expected dividends that might be paid by Vodafone Plc. The second method is considered to be associated with employing statistical analysis methods where consideration to mean, and standard deviation values are being considered. This method is however considered to be a challenging and a tough method and is neglected for estimation of dividend growth rate of Vodafone.

Workings of deriving dividend growth rates

Particulars	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Dividend Paid by VOD	£ 0.50	£ 0.46	£ 0.55	£ 0.56	£ 0.50	£ 0.56	£ 0.56	£ 0.57	£ 0.53	£ 1.14	£ 0.47
Dividend Growth	£ 0.03	-£ 0.08	-£ 0.02	£ 0.06	-£ 0.05	-£ 0.01	-£ 0.01	£ 0.04	-£ 0.62	£ 0.67	£ 0.47
Dividend Growth Rate	7.11%	-14.86%	-3.37%	11.90%	-9.35%	-1.42%	-1.57%	8.32%	-53.76%	141.86%	0.00%
Expected Dividends Using Compounding Method
2023	$ 1.07
2024	$ 2.16
2025	$ 2.01
2026	$ 0.93
2027	$ 0.46
2028 and Onwards	$ 0.50
Expected Dividend Growth Rate
2023	$ 1.04
2024	$ 2.08
2025	$ 2.01
2026	$ -0.14
2027	$ -1.69
2028 and Onwards	$ -1.52
Expected Dividend Growth Rate Percentage
2023	208.88%
2024	194.57%
2025	93.36%
2026	-6.83%
2027	-181.14%
2028 and Onwards	-326.52%

Table 1: Computation of Expected Dividend Growth Rate

The above table of computation for expected dividend growth rate in 2023, 20224, 2025, 2026, 2027 and beyond 2028 implies that expected dividend growth in all these years are numerically expressed as $ 1.07, $ 2.16, $ 2.01, $ -0.14, $ -1.69 and $ -1.52, respectively. Subsequently, the dividend growth rate percentage that are being calculated for 2023, 20224, 2025, 2026, 2027 and beyond 2028 are considered to be 208.88%, 194.57%, 93.30%, -6.83%, -181.14% and -326.52%, respectively. The arithmetic progression as well as the compounding technique has been employed and used for the calculation of expected dividend growth rate. Therefore, it can be precisely observed that dividend in initial years is observed to follow stagnated growth followed by a declining growth. Hence, it is expected that in future years no dividend would be paid by Vodafone to its shareholders. The strategy to remove dividend payout in future could be a tactical adjustment which is mainly framed to restructure capital value of an organisation (Aftab and Naveed, 2022).

Estimation of the required rate of return using CAPM model based on OLS method

The determination of Returns along with dividend facilitated is considered to be an important and essential financial management aspect for Vodafone to ascertain better future funding availability and propositions. The ascertainment of returns is perhaps more plausible and credible when two important methods Plcluding the capital asset pricing model method as well as the ordinary least squares method are being contemplated. The following exercise mainly encourages the ascertainment of the Capital Asset pricing module for Vodafone by considering a ten-year analysis period. This is subsequently followed by the computation of ordinary least squares method where regression analysis is being contemplated to determine the overall relationship between returns available.

Data Preparation

Computation of CAPM for VOD
Particulars	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Risk Free Rate	0.045132546	0.030893864	0.036784	-0.00409261	0.031410346	0.010836635	0.024194603	-0.015372622	-0.02621	-0.01655
Market Risk Premium - Risk Free Rate	0.084156262	0.005342463	0.05232	0.007866239	-0.048968456	-0.024569708	0.092776829	0.003156902	-0.06503	0.014048
Beta	1.29	1.31	1.32	1.26	1.21	1.19	1.17	1.14	1.11	1.08
CAPM (Expected Rate of Return)	15.37%	3.79%	10.58%	0.58%	-2.78%	-1.84%	13.27%	-1.18%	-9.84%	-0.14%

Table 2: Computation of Capital Asset Pricing Model

The data preparation stage or step has been substantiated through performing a thorough computation and calculation for the Capital Asset pricing model (CAPM) of returns available for Vodafone. The risk-free rate from the above table considers calculations for 2019 and 2018 as 0.0451 and 0.0308, respectively. Subsequently, risk free rate for 2017, 2016, 2015 and 2014 considers numerical values as 0.0367, -0.0040, 0.0314 and 0.0108. The risk-free return for 2013, 2012, 2011 and 2010 has been calculated as 0.0241, -0.0153, -0.0262 and -0.0165, respectively. The Capital asset pricing module values that have been calculated from 2019 to 2010 include numerical figures of 15.37%, 3.79%, 10.58%, 0.58%, -2.78%, -1.84%, 13.27%, -1.18%, -9.84% and -0.14%, respectively.

As per illustrations and opinions of Hendrawan et al. (2020), the Capital Asset pricing module method is considered to be a beneficial method to ascertain overall prospects of expected return available with respect to consideration of market risk premium and beta value. Therefore, from the above table of calculations and computation of CAPM, it can be determined that expected rate of return In 2019 is comparatively higher as opposed to 2018, while expected date of return in 2018 was also considerably higher in comparison to 2017 expected rate of return values.

Regression Analysis

Regression Statistics
Multiple R	0.729260098
R Square	0.53182029
Adjusted R Square	0.527918792
Standard Error	0.058239735
Observations	122
ANOVA
df	SS	MS	F	Significance F
Regression	1	0.462351566	0.462352	136.3118337	1.66049E-21
Residual	120	0.407024001	0.003392
Total	121	0.869375568
Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	-0.00194763	0.005387002	-0.36154	0.718329787	-0.012613519	0.008718259	-0.012613519	0.008718259
X Variable 1	0.851495178	0.072931545	11.67527	1.66049E-21	0.707095795	0.995894561	0.707095795	0.995894561

Table 3: Computation of Regression Analysis

In addition to consideration of computation for Capital Asset pricing module techniques, the computation of regression analysis is also considered to be an important and essential aspect that is being contemplated to establish relationship between returns. The dependent variable for conducting regression analysis of returns is considered to be the risk-free rate or the gilt rate, while the independent variable has been considered as the difference between market risk premium and risk-free rate. Accordingly, the significance value achieved from the above table of regression analysis between two variables, it can be determined that a numerical expression of 1.66 has been achieved.

In addition to determining the significance value, correlation coefficient calculated between both variables presents a numerical expression of 0.8514. Therefore, it can be concluded that the relationship between both variables of risk-free rate and the difference between market risk premium and risk-free rate is high and direct. Therefore, changes or fluctuations in risk free rate usually changes the value of the difference between market risk premium and risk-free rate. As per illustrations and opinions of Wu (2020), presence of a direct relationship between two variables as per a regression analysis is considered to be significant and is statistically proven to neglect null hypothesis.

Discussion of the estimation results

The overall assessment as per the above tables demonstrated for computation of Capital Asset pricing module as well as regression analysis suggest that expected rate of return is mostly associated with fluctuations in risk free rate as well as market risk premium. The assessment of expected rate of return as per the CAPM calculations also suggests an increasing and declining trend for expected rate of return, where it is evident that expected rate of return in 2020 has increased substantially in comparison to 2019. Simultaneously, the expected rate of return has decreased in 2019 as compared to 2018, while an increasing trend has been administered between 2018 and 2017 numerical expressions achieved.

On the basis of contemplating computations derived from regression analysis, it can be precisely observed that a direct relationship is prevalent between risk free rate and market risk premium. Hence, a decrease in the values of risk free or gilt rate is most likely to reduce the overall values achieved for market risk premium as market risk premium values are largely dependent upon values obtained for risk free rate. This is further addressed on the basis of calculating the significance values as well as the correlation coefficient values achieved. Hence, it can be overall described that dividend payout prospects of Vodafone are in a favourable state currently and chances of attracting a higher bulk and traffic of investors could be contemplated in a hassle-free mannerism.

Calculation of the intrinsic value

Particulars	2020	2019	2018	2017	2016	2015	2014	2013	2012	2011	2010
Dividend Paid by VOD	£ 0.50	£ 0.46	£ 0.55	£ 0.56	£ 0.50	£ 0.56	£ 0.56	£ 0.57	£ 0.53	£ 1.14	£ 0.47
Strike Price	$ 0.08	$ 0.01	$ 0.05	$ 0.01	$ -0.05	$ -0.02	$ 0.09	$ 0.00	$ -0.07	$ 0.01	$ 0.02
Intrinsic Value	$ 0.41	$ 0.46	$ 0.49	$ 0.56	$ 0.55	$ 0.58	$ 0.47	$ 0.57	$ 0.59	$ 1.13	$ 0.45

Table 4: Computation of Intrinsic Values

As per the above table of calculations for intrinsic value, the strike price method has been considered instead of the conventional future value method. This is justified on the fact that the strike price method is perhaps more conducive for assessing overall intrinsic values available when dividends are being prioritised instead of cash flows. As per explanations and illustrations of Kleriawan and Dwiyono (2021), strike price is considered to be the price in which shares and collateral securities can be traded. This trading is propelled in an exchange market and can be determined on the basis of identifying overall prospects of gilt rate and market risks available.

The above table of calculations suggests that the intrinsic value of dividends for 2019 has been calculated as $ 0.41, while for 2018 and 2017 it has been calculated as $ 0.46 and $ 0.49 respectively. Hence, the intrinsic value is considered to be following a decreasing trend and pattern in 2019 and 2018 as well as establishes a decreasing pattern for 2017. Gnap (2023), stated and idealised that a decreasing trend and potential for intrinsic value is considered to be a challenge as asset value could decrease in future. Hence, the probability of asset value degradation could potentially occur for Vodafone Plc. if appropriate counteractive steps are not taken timely.

Discussions, Summary and Critical Aspects of DDM and CAPM

The discussion and the overall summary shall be contemplated on the basis of considering the overall returns and dividend paid by Vodafone Plc in the year 2020. This discussion shall be formed on the basis of considering previously evaluated results as per CAPM and the regression analysis as well as the intrinsic value methods. Further importance shall be offered for considering the overall critical aspects of dividend discount model as well as the Capital asset pricing module methods. This will be determined on the basis of considering various limitations associated with both these methods.

Summarisation of estimation results

Overall summarisation and estimation of results applicable for expected rate of returns suggests that a higher rate of return is expected in the future for Vodafone Plc. This is further justified on the basis of considering CAPM, regression and intrinsic value analysis where available risk-free rate and its potential Increasing forecasts in the future are considerably weighed in high proportions. The dividend availability on the other hand as per the computation of arithmetic progression and compounding method suggests that in future dividends for Vodafone are expected to fall. Hence, it can be determined that a no-dividend policy might be initiated in future by Vodafone Plc.

Critique of DDM and CAPM

DDM

The critique of DDM can be associated with identifying fundamental disadvantages associated which are considered to be providing insufficient numerical backing for ascertaining future fund availability. The lack of future fund availability for DDM is considered to be a highly influential parameter as only dividends are being administered to ascertain income that could be generated by organisations in future (Hibban and Wardana, 2022).

CAPM

CAPM is considered to be a critical method where its primary disadvantages mainly consist of making projections based on formulating unreliable assumptions and forecasting. As per critical views and statements of Lyu (2021), the CAPM method is also considered to be inconclusive as adherence to arbitrage and transactional costs are highly neglected for calculations.

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Conclusion

This assignment has exclusively defined dividend discount model and its various stages that includes initial growth, stable growth and declining growth respectively. On the basis of contemplating above calculations of expected rate of return as well as dividend, the possibility of higher and increasing expected rate of return is bullish while dividend payout possibility is bearish for Vodafone Plc. Subsequently this assignment has also highlighted the important aspects of DDM and CAPM where both methods are considered to be disadvantageous for ascertaining the overall prospects of monetary funding available.

References

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