Fair Value Analysis

Intrinsic Generator

Inputs

Growth Choices

Enter current level of index

1951.13

Historical earnings growth rate (last decade) =

4.27%

Enter percentage change in aggregate earnings in the S&P 500

Bottom up forecasted growth rate (next 5 years) =

10.00%

What proportion of earnings can companies continue to return?

Top down forecasted growth rate (next 5 years) =

6.30%

Enter the proportion of these earnings that will be returned to stockholders

91.02%

Fundamental growth rate (based on current ROE) =

1.46%

What expected growth rate do you want to use for the next 5 years?

Fundamental growth rate (based on average ROE) =

1.45%

Expected growth rate in earnings for the next 5 years =

6.30%

Enter current long term risk free rate =

2.27%

ERP Choices (for index intrinsic value)

If you want to compute an intrinsic value for index, what ERP would you like to use?

Direct

Historical Equity risk premium (US) =

2.00%

HUS

ERP used to compute fair value of index (you can override this number) =

6.33%

Historical Equity risk premium (Global) =

4.00%

Expected growth rate in the long term (after year 5) =

2.27%

Average implied ERP (last decade) =

3.00%

ERP10

Average implied ERP (1960-Current) =

1.00%

ERPLong

Base numbers

Historical High ERP (1960-Current) =

2.00%

ERPHigh

Base year earnings (adjusted for percentage change in B2)

111.60

Direct Input

6.33%

Direct

Base year cash flows (based on proportion specified in B3)

101.58

Proportion of Cash Returned to Investors

Current level

91.02%

Historical average (last 5 years) =

73.68%

Cash5

Historical average (last 10 years) =

84.37%

Cash10

Direct input =

80.00%

Direct

Intrinsic Value Estimate (based on your choice of ERP)

Expected Dividends =

$ 107.98

$ 114.78

$ 122.01

$ 129.70

$ 137.87

Expected Terminal Value =

$ 2,227.47

Present Value =

$ 99.43

$ 97.32

$ 95.26

$ 93.24

$ 1,565.83

Intrinsic Value of Index =

$ 1,951.08

Intrinsic Trailing PE =

17.48

Intrinsic CAPE (based on inflation-adjusted ten year average earnings) =

23.61

Percentage change in index from current level =

0.00%

Dividend on Shares

Year	Dividend Yield	Buybacks/Index	Gross Cash Yield	Payout	Return on Equity	Net Profit Margin
2001	1.37%	1.25%	2.62%	77.43%	11.92%	5.27%
2002	1.81%	1.58%	3.39%	64.78%	13.61%	6.82%
2003	1.61%	1.23%	2.84%	57.74%	16.79%	7.69%
2004	1.57%	1.78%	3.35%	59.99%	18.43%	8.59%
2005	1.79%	3.11%	4.90%	80.01%	18.43%	8.74%
2006	1.77%	3.39%	5.16%	83.40%	19.36%	9.21%
2007	1.92%	4.58%	6.49%	115.53%	16.36%	8.05%
2008	3.15%	4.33%	7.47%	136.37%	9.35%	4.75%
2009	1.97%	1.39%	3.36%	65.82%	12.60%	6.26%
2010	1.80%	2.61%	4.42%	66.28%	16.31%	8.70%
2011	2.11%	3.56%	5.67%	73.91%	16.65%	9.16%
2012	2.19%	3.13%	5.32%	78.39%	15.79%	8.86%
2013	1.89%	2.88%	4.77%	84.00%	15.73%	9.39%
2014	1.92%	3.03%	4.95%	87.80%	16.23%	9.96%
Average: Last 10 years =			5.25%	84.37%	15.68%	8.31%
Average: Last 5 years			5.03%	73.68%	16.14%	8.48%

Index at the start of the current quarter =2063.11Base for normalized Cashflow; Updated at the start of every quarter

	Updated at the start of every quarter			Last updated	01-Jul-15

Year	Market value of index	Earnings	Dividends	Buybacks	Stock Issuances	Cash to equity		Dividend yield	Buyback yield	Gross Cash Yield	Net Cash Yield	Book Value of Equity at start of year	Sales per share	Inflation rate	Inflation adjusted Earnings
2001	1148.09	38.85	15.74	14.34		30.08		1.37%	1.25%	2.62%		325.8	736.88	1.60%	50.62
2002	879.82	46.04	15.96	13.87		29.83		1.81%	1.58%	3.39%		338.37	674.59	2.48%	58.54
2003	1111.91	54.69	17.88	13.70		31.58		1.61%	1.23%	2.84%		325.72	710.81	2.04%	68.15
2004	1211.92	67.68	19.01	21.59		40.60		1.57%	1.78%	3.35%		367.17	788.17	3.34%	81.61
2005	1248.29	76.45	22.34	38.82		61.17		1.79%	3.11%	4.90%		414.75	874.32	3.34%	89.21
2006	1418.30	87.72	25.04	48.12		73.16		1.77%	3.39%	5.16%		453.06	952.51	2.52%	99.84
2007	1468.36	82.54	28.14	67.22		95.36		1.92%	4.58%	6.49%		504.39	1025.08	4.11%	90.24
2008	903.25	49.51	28.45	39.07		67.52		3.15%	4.33%	7.47%		529.59	1042.46	-0.02%	54.14
2009	1115.00	56.86	21.97	15.46		37.43		1.97%	1.39%	3.36%		451.37	908.4	2.81%	60.47
2010	1257.64	83.77	22.65	32.88		55.53		1.80%	2.61%	4.42%		513.58	962.71	1.44%	87.83
2011	1257.60	96.44	26.53	44.75		71.28		2.11%	3.56%	5.67%		579.14	1052.83	3.03%	98.15
2012	1426.19	96.82	31.25	44.65		75.90		2.19%	3.13%	5.32%		613.14	1092.37	1.77%	96.82
2013	1848.36	104.92	34.90	53.23		88.13		1.89%	2.88%	4.77%		666.97	1116.81	1.53%	104.92
2014	2058.90	116.16	39.55	62.44	9.58	101.98	92.40	1.92%	3.03%	4.95%		715.84	1165.8			Trailing four quarter data for now. Will be updated to actuals in April 2015
Trailing four quarters		111.60	40.85	60.73	10.39	101.58	91.19					693.22	1165.8			Updated at the start of every quarter	Last updated	01-Apr-15
Last quarter		107.63	39.33	62.08	10.39	101.40	91.01									Updated at the start of every month	Last updated	01-Apr-15
		Market Cap	Index level	Unit adjuster	Dividends	Buybacks
	31/12/2014	18245	2058.9	0.112847355	362.02	538.12
	2013	16495	1848.36	0.112055774	311.77	475.59
	2012	12742	1426.19	0.111928269	280.69	398.91
	2011	11385	1257.6	0.110461133	240.20	405.08
	2010	11430	1257.64	0.110029746	205.83	298.82
	2009	9928	1115.00	0.112308622	195.61	137.65
	2008	7852	903.25	0.115034386	247.29	339.64
	2007	12868	1468.36	0.114109419	246.59	589.12
	2006	12729	1418.30	0.111422735
	Ratio
Index units adjuster =	0.112847355

Computing the trailing 12 month number (S&P Data updated every quarter on March 15, June 15, Sept 15 and Dec 15)
Quarter	Earnings	Dividends	Buybacks	Issuances
Last quarter	228.36	93.55	144.13		Updated July 1, 2015
2 quarters ago	237.14	92.8	132.63
3 quarters ago	262.92	89.02	145.19
4 quarters ago	260.5	86.65	116.17
Sum	988.92	362.02	538.12	84.87

S&P Capital IQ data (updated every month)
Month	Earnings	Dividends	Buybacks	Issuances
7/1/15	953.729	348.51	550.08	92.07

S&P

This is what I get from S&P Capital IQ, if I use the raw data from individual companies. It does not match up to what S&P itelf reports once every quarter. Use it to look for trend lines.
		Aggregate (in US dollars)								In Index Units
Month	S&P 500 Index	Market Cap	Dividends	Buybacks	Stock Issues	Net Income	Cash Return	Net Cash Return	Index Units	Market Cap	Dividends	Buybacks	Stock Issues	Net Income	Cash Return	Net Cash Return	Payout Ratio	Dividend Yield	Cash Return/Net Income	Net Cash Return/Net Income
01-Aug-15	2103.84	19,712,475	263808	423600	75426	923972	$687,408	$611,982	0.000106726	2103.84	$28.16	$45.21	$8.05	$98.61	$73.36	$65.31	28.55%	1.34%	74.40%	66.23%

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Question

Stock Index Fair Value Analysis

Many of topics in finance deal with individual security analysis, but there aren’t a lot of real robust forecasts about the fair value of market indices. 90% of returns in a portfolio come from asset allocation, or beta risk. Finding fair value is essential for any investor looking to value risk and expected return in the Stock market. Investing in a great company doesn’t make a lot of sense if the overall market is expected to fall, since usually all stocks fall when the stock market is overvalued. So, lets value the S&P 500 Index.

Fair Value Analysis

On 2/19/20 the S&P 500 closed at 3,386.

Because the index is composed of the largest companies in the U.S. with strict standards to be in the index, the S&P 500 is considered a perpetuity. The index will never go out of business because the S&P committee kicks out any declining stocks and replaces them with new profitable companies.

For the reasons the S&P 500 could be considered a growing perpetuity.

Growing Perpetuity Formula

P𝑃𝑃 = 𝐶𝐶1 (𝑟𝑟 − 𝑔𝑔)

PV = The present value of all future cash flows or the fair value for the investment

C1 = Next year’s cash flow – Use S&P operating earnings. Go to S&P 500 website for the Index earnings spreadsheet. Always use forward estimates.

r = required rate of return on S&P 500 – Your team will have to construct this rate using a risk-free rate and a estimated equity risk premium. Your team must show their work and sources for full credit.

g = Long term growth rate of C1 – Your team must come up with a best estimatie of the long term growth rate of the S&P 500 Index.

Using data from the S&P 500 website, especially the Index Earnings Spreadsheet, and market data, calculate the fair value of the S&P 500 index using the growing perpetuity formula.

Make the model solve for the current S&P 500 price by modifying the inputs. As you may gather the long term data om the index you may have to use one or two plug figures.

Make sure that your inputs are all explained and the reasoning behind getting the data to populate the growing perpetuity model.

Construct a S&P 500 ‘fair value’ model. It needs to solve for the PV of the S&P 500 Index
Construct a Word doc explaining your calculations and sources of information to arrive at your teams fair

Dropbox all of your documents and spreadsheet.

Fair Value Analysis