If you have been reading my posts, you know that I have an obsession with equity risk premiums, which I believe lie at the center of almost every substantive debate in markets and investing. As part of that obsession, since September 2008, I have estimated an equity risk premium for the S&P 500 at the start of each month, and not only used that premium, when valuing companies during that month, but shared my estimate on my
It looks like buybacks only inform the trailing/base year cash flows (and this cash flow base is comparable to the earnings base), then does not inform the growth, which is a function of only earnings; and then the DCF is a cash flow payout (buybacks again) ... so I don't think he double counts because cash (incl buybacks) is the base and earnings inform growth of that base.
But the recipe is still fuzzy with respect to future payout ratios (and the intersection of future cash vs earnings); do they have an input role or are they just derivative. I don't think he double counts but there is for me recipe confusion (around that 3rd step).
Earnings multiplied by payout ratio (either static or fade to target) = Cash
To answer my own question, the payout is derived. The intrinsic value of the Index is a discounted function of the trailing cash base grown at the earnings growth rate (with toggle to fade that growth rate effectively).
Regarding your point about models needing to evolve to properly meet current factors...
I’d love your take on how the huge amount of Passive Fund flows might interact with this.
Meaning, do the enormous flows into index funds diminished in any way the usefulness of these models when those passive funds are ignoring all valuation, models, and just buying regardless?
And,
I’m seeing some interesting analysis being done on the powerful effect the broadest measures of global liquidity having more effect on expanding PE ratios than were previously thought.
I understand wanting to include earnings growth. I am not sure about including earnings growth *and* stock buybacks. Not a double counting issue?
It looks like buybacks only inform the trailing/base year cash flows (and this cash flow base is comparable to the earnings base), then does not inform the growth, which is a function of only earnings; and then the DCF is a cash flow payout (buybacks again) ... so I don't think he double counts because cash (incl buybacks) is the base and earnings inform growth of that base.
But the recipe is still fuzzy with respect to future payout ratios (and the intersection of future cash vs earnings); do they have an input role or are they just derivative. I don't think he double counts but there is for me recipe confusion (around that 3rd step).
Actually I opened the XLS. It's not double-counting. But it is regrettable XLS design.
Basically,
Trailing Cash (dividends + buybacks) / Earnings = trailing cash payout.
Earnings projected per growth rate assumption.
Earnings multiplied by payout ratio (either static or fade to target) = Cash
To answer my own question, the payout is derived. The intrinsic value of the Index is a discounted function of the trailing cash base grown at the earnings growth rate (with toggle to fade that growth rate effectively).
Extraordinary work; enlightening and useful. Thanks
Thanks for your high quality work.
Regarding your point about models needing to evolve to properly meet current factors...
I’d love your take on how the huge amount of Passive Fund flows might interact with this.
Meaning, do the enormous flows into index funds diminished in any way the usefulness of these models when those passive funds are ignoring all valuation, models, and just buying regardless?
And,
I’m seeing some interesting analysis being done on the powerful effect the broadest measures of global liquidity having more effect on expanding PE ratios than were previously thought.
Anyway, appreciate your work. Thanks.