Use Kinder Morgan (KMI), United Parcel Services (UPS) The 2 companies are: Orige

Question

Use Kinder Morgan (KMI), United Parcel Services (UPS)

The 2 companies are: Origen Financial (ORGN) and Martin Midstream (MMLP)

Dividends paid by Kinder Morgan

2013 2014 2015 2016 2017
Dividend. 4.6        4.6 7.5 2.4. 2.4

Dividends paid by UPS

2013 2014 2015 2016 2017
Dividend    2.5    2.9 2.5     2.8 2.9

These companies paid out dividends for the past five years (2013 – 2017)

Using the past dividend payout information between 2013 and 2017, compute the growth rate (g) for these companies. Your companies must have complete history of dividend payout during these periods. You can find such information at www.dividendinformation.com. If your company lacks the dividend payout information, you need to select new company. Show me your works (35 points).

First, let’s assume that required return (R) is 10% for all these companies. Using R, dividend information, and growth rate (g) from the question 1, compute the stock prices of these companies. Second, let’s assume that required return (R) is 20% for all these companies. Using R, dividend information, and growth rate (g) from the question 1, compute the stock prices of these companies. Show me your works (35 points).

Compare your estimated stock prices with actual stock price (January 2, 2018). Then tell me whether each stock is undervalued or fair-valued or overvalued based on your estimation. What’s your decision if you hold these stocks? What’s your decision if you don’t hold these stocks? Show me your works (30 points).

Explanation / Answer

10% required return, Price of UPS = 146.96

Price of JPM = N/A (high dividend growth than expecte return)

20% required return, Price of UPS = 28.73

Price of JPM = 101.54

Price of UPS on Jan 2, 2018 = 123.67. For a required rate of return of 10% it is undervalued and for a 20% return, grossly overvalued.

Price of JPM on Jan 2, 2018 = 107.95. For a required rate of return of 20% it is slightly overvalued - but mostly in range of the value through dividend growth model

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