Understanding Hershey Corporation's Dividend Growth and Valuation
Detail Explanation:
Hershey Corporation's Dividend Growth: Hershey Corporation has been increasing its annual dividend by about 4.5 percent in each of the last 20 years. The firm's president has stated in the annual report that they intend to continue this uninterrupted dividend growth at the same rate.
Gordon Growth Model: The Gordon Growth Model is a method for valuing a stock based on the theory that the stock price is determined by the expected future dividends. The formula calculates the intrinsic value of a stock based on the dividends, required rate of return, and expected growth rate of dividends.
Calculation of Intrinsic Value: In this case, given the dividend growth rate of 4.5%, the most recent dividend of $1.04 per share, and a required rate of return of 6.67%, the intrinsic value of Hershey's stock is calculated to be $50.03 using the Gordon Growth Model formula.
Implication for Investors: Investors analyzing Hershey Corporation's stock may consider purchasing shares as the calculated intrinsic value exceeds the current market price. This suggests that the stock may be undervalued based on the expected future dividends and growth rate.
Therefore, investors seeking to benefit from potential capital appreciation and dividend income may find Hershey Corporation's shares attractive based on the valuation by the Gordon Growth Model.