Stock valuation in Pacific Alliance countries using the dividend discount model

Abstract

The objective of this study is to analyze investment opportunities in publicly traded firms in Pacific Alliance countries using the dividend discount model. The software Economática was employed to collect multiple data: closing price of stocks traded in April 2018, dividends per share, earnings per share, beta coefficient, and Return on Equity (ROE). Subsequently, the stocks were valued, and the outcome was compared with the MSCI (Morgan Stanley Capital International) indexes for the Pacific Alliance. The results show a generalized overvaluation of the stocks under study. Mexico stands out with an above-average overvaluation, high volatility, and greater average ROE. A significant relationship was also observed between the ROE and the plowback ratio of such stocks. The overvaluation indexes suggest the hypothesis that dividends cannot efficiently represent a clear expectation of the value of a company. However, such inefficiency could be caused by the methodology adopted to determine the discount rate, which generates a discount rate higher than the market implicitly accepts. Regardless, the valuation by the dividend discount model can serve as a reference point for investment opportunities in companies in the Pacific Alliance.

Keywords

• Dividend discount model
• financial stock analysis
• valuation methods
• Pacific Alliance