Statistical and Quantitative Analysis

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Rationale of choice of company and of Dividend discount model (DDM)................................1
Different methods of estimating Dividend Growth rate ............................................................4
Calculation of Dividend Growth rate of Unilever.......................................................................5
Required rate of return and stock performance for 5 years.............................................................6
Unilever stock performance along with market in last 5 years...................................................6
Estimation of model....................................................................................................................7
Discussion on estimated results..................................................................................................9
Required rate of return using CAPM model.............................................................................10
Calculation of Intrinsic Value of Unilever.....................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Statistical and quantitative analysis refers to a process of collecting a range of numerical
data and application of different statistical tools in order to determine the results from the
observations. Unilever is a UK based international company which was founded in 1929. It is
one among dual listed companies which is registered in the stock exchange of UK and
Netherlands. In the meantime it sales consumable goods to its customers of more than 400
brands in more than 190 countries.
The present study shows a brief description of Unilever and suitability of it with
Dividend discount model (DDM) for the purpose of showing rationale for the choice.
Fuethermore, the rationale part of the assignment provides justification of the decision regarding
number of stages decided to be taken for estimation of dividend growth of Uneliver. Further, it
describes a detailed description about different methods used for estimating dividend growth
along with workings of deriving those rates. In addition, the study shows preparation of data
regarding CAPM model based on OLS method. Moreover, it shows calculations of deriving
intrinsic value of the company. At the end of assignment, it shows a summary of overall
estimations and critical evaluating of all the models used in the assignment i.e. DDM, CAPM
and OLS.
MAIN BODY
Rationale of choice of company and of Dividend discount model (DDM)
Unilever Plc
Unilever is one of the top most brand of the international market. It sales a range of
consumable products to its customers at worldwide. Further, as the company is listed in London
stock exchange as well as stock exchange of Netherlands, it can be considered as a good choice
for the project in order to develop a good understanding over valuation intrinsic value of
ordinary shares of a publicly traded company.
Further, Unilever has developed its effective plans and strategies regarding maintaining
corporate governance within its business (Unilever Analysis — Warren Buffett Valuation. 2017) .
With the help of which it leads in maintaining transparency with its stakeholders and maintain
confidence and trust of its investors and other stakeholders as well. It results in increasing the
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attraction of shareholders towards the company and developing it as one of the most publicly
traded company as well.
Analysis of company's performance and plans for its shareholders, it can be evaluated
that company have a policy to pay a decent amount of dividend to its shareholders each year. It
helps the company in providing sufficient amount of satisfaction to its members and motivate
them to sustain with the company for long run as well.
In addition to this, company's policy of fulfilling its corporate social responsibility also
leads in increasing the attractiveness of stakeholder towards the company. It also helps the firm
in increasing the value of business at stock market that leads in rising the intrinsic value of
company at rapid rate.
Unilever has been categorized into two controlling company, namely, Unilever Plc which
is registered under London stock exchange and Unilever N.V. that is registered under the stock
Exchange of Netherlands. Being public limited organisation, the major goal and objective of it is
wealth maximization. With the help of efficient business policies and their implications, the
Unilever becomes able to generate maximum amount of profit from the organisation, the firm
also improve its ability of paying dividend. Therefore, the Unilever becomes able to attract
maximum amount of shareholders towards it due to its increased dividend paying capacity.
Dividend discount model
DDM also known as dividend discount model is one version of dividend growth model. It
is used by the investors in order to estimate the future value of company's shares in the stock
market. The dividend discount theory describes the present value of company's shares as a sum
of present value of the dividend that would be paid by the firm in near future (Dividend Discount
Model (DDM). 2017). Further, the model describes amount of dividend to be paid by the
company as a part of profit generated by it. As per the DDM model, by estimating the future
value of company's cash flow, firm's capacity to pay dividend can be estimated. Further, by
determining present value of all the estimated dividend, one can estimate the value of company's
shares at the stock exchange. The estimation regarding growth in the rate of dividend is taken
generally on the basis of GDP growth rate of the country, as the growth of company have a huge
influence of economical growth of the country.
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The dividend growth model helps in prediction of amount of dividend top be paid by the
company in its near future. The amount of future dividend depends upon the growth rate or rate
with which the company increases its dividend for its shareholders. In case, the company adopts
a methodology of increasing dividends at a constant rate, it becomes easy to determine future
dividend (Michaely, Rossi and Weber, 2018). It is an analytical strategy adopted by financial
experts in order to derive the profitability of the investors in context to generation of maximum
profit from the investment made by them in any specific company. The core objectives behind
dividend growth model is to determine the fair market value of shares of any company.
Due to its core objective of maximum profit generation, the company develops its
strategies and plans in order to increase its profitability. In addition, in order to maintain
sufficient amount of liquidity within the firm, the financial managers of the firm develops their
effective strategies and plans regarding retained earnings and payment of dividend as well. With
the help of these plans and procedures, Unilever becomes able to maintain sufficient liquidity
along with paying appropriate amount of dividend to its stakeholders. In addition, the company
also have a policy to increase the rate of dividend to be paid to its stakeholder with increase in its
revenue generation capacity. Furthermore, with the help of directions of managers and directors,
the company keeps increasing the reward for shareholders and also regular amount of dividend to
its stakeholders. Therefore, Dividend distribution modal can be determined as the most
appropriate model used by the company. As this model helps in analysing and computing the
estimated value of future dividends of those companies who consistently increases the amount of
dividend for the company.
By analysing the financial trends of Unilever, it can said that company's sales, revenue
generation and profit earning contains an increasing trends. It leads in increment of the liquidity
of the company (Mwangi, 2017). In addition, due to policy adopted by Unilever's managers
regarding payment of dividend, it keeps increasing the amount of dividend with increase in its
financial condition. Further, as the dividend discounting model helps in determining the value of
dividend in case when any business has adopted increasing trend for the payment of dividend, In
this regard, it can be said that use of Dividend discounting model and dividend growth modal is
suitable for evaluation of estimated amount of dividend to be paid to its shareholders.
Justification of number of stages of dividend growth
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Number of stages of dividend growth refers to number of years for which the amount of
dividend to be paid to the shareholder are being estimated. The prediction of company's dividend
depends upon the future value of money within the economical environment. Due to
uncertainties of economical growth in the country, determination of future value for a long
period can provide negative results to the company. In this regard, in the present assignment it is
decided to make the estimation for 2 to 3 years regarding estimation of the future value of
company.
Moreover, in UK during last years, the GDP of the country is growing with the rapid rate.
It has been assumed that the company's financial position will grow with the growth in overall
economical condition. In this regard, the future values of profits earned by the company is being
determined on the basis of increase in the GDP of the country. Therefore, for estimation of value
of dividend and growth in the rate of dividend of Unilever, the revenue generation capacity,
company's policy regarding maintenance of retained earning, discounting factor for the future
estimations are being utilised. Along with these, the GDP growth rate of UK has also been
considered in order to estimate the value of profitability of the company. With the help of this
estimation, amount of dividend can be estimated accurately as it affects the dividend distribution
capacity of the company.
Thus, by taking into account all these factors and different assumptions, it has been
decided to estimate the amount of dividend using 2 to 3 years of estimations. This decision
would lead in maintenance of accuracy in the estimations along with elimination of probability
of wrong estimation. In addition, by estimating the intrinsic value of company through dividend
discounting model would help in making the calculation of estimations easily. Furthermore, as
the model leads in taking into consideration all the future values and incremental rate of
company in context to payment of dividend, the accuracy of the estimation would be improved.
Presenting Dividend Growth Rates
Different methods of estimating Dividend Growth rate
Dividend Growth Model can be estimated through Gordon Growth model. This model
helps in calculation of intrinsic value of the company. It assumes that the dividend is growing at
a constant rate from one year to another (Piatti, 2019). The present intrinsic value is calculated
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by dividing the dividends from cost of capital of Unilever. Formula for calculation of Dividend
Growth Model by Gordon Growth Model is-
P= D 1 / (r-g)
where; P= Current market price of the stock
g= Constant growth rate which the company is expecting to grow every year
r= Weighted average cost of capital or rate of return
D 1= Dividend of next Year
Calculation of Dividend Growth rate of Unilever
Particulars Dividend per share (£)
% change in Dividend per
share
Year 2018 1.5 7.14%
2017 1.4 10.24%
2016 1.27 0
Average % change in
Dividend 8.69%
Dividend Growth rate can be estimated by using change in current year dividend per
share over the previous year dividend per share. Average dividend growth is calculated in order
to know growth rate which the company is expecting.
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Required rate of return and stock performance for 5 years
Unilever stock performance along with market in last 5 years
Figure 1Trend of stock price and FTSE 100
Figure 2MOM change in stock price and FTSE
From chart given above it can be seen that stock price of Uniliver and FTSE 100 move in
alignment to each other. Both move upward but rate of increase in price is low. Chart given
above is also indicating that % change on monthly basis (MOM) of both stock and FTSE are in
same direction but rate of change in the Uniliver price is higher then market. It can be seen that
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there are couple of occasions where this percentage gap is huge between both which indicate that
sometime Uniliver share beat market or underperform relative to market. Huge difference on
some points is indicating turmoil in the market. Means that due to consistent fluctuation in the
market investors lose confidence and decide to close their open position in the market. Due to
this reason specific day bearish trend is observed in respect to Uniliver shares. Similarly, on any
occasion investor observed that market is moving upward then bullish trend is observed. Hence,
it can be said that stock is sensitive in nature and with any consistency in trend in FTSE 100
strong upward or downward trend is observed in Uniliver shares. Overall, it can be said that in
last 5 years stock price and market rose upward but at low rate.
Estimation of model
Regression Statistics
Multiple R 0.6034
R Square 0.364091
Adjusted R Square 0.318669
Standard Error 36.51169
Observations 16
ANOVA
df SS MS F
Significance
F
Regression 1 10685.8 10685.8 8.01573 0.0133
Residual 14 18663.45 1333.104
Total 15 29349.25
Coefficient
s
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Intercept -665.917 2013.135 -0.33079 0.745705 -4984 3651.828 -4983.66
X Variable 1 0.756057 0.267044 2.831207 0.013335 0.1833 1.32881 0.183304
RESIDUAL
OUTPUT PROBABILITY OUTPUT
Observation Predicted Y Residuals
Standard
Residuals Percentile Y
1 5002.622 -94.1219 -2.66834 3.125 4908.5
2 5049.271 -33.2708 -0.94322 9.375 4998.5
3 5087.149 -4.14895 -0.11762 15.625 5003
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4 5082.84 -20.8396 -0.5908 21.875 5011
5 5044.659 0.341244 0.009674 28.125 5016
6 5041.786 19.21448 0.544726 34.375 5022
7 5032.108 5.891867 0.167033 40.625 5025
8 5027.723 -5.72315 -0.16225 46.875 5030
9 5011.921 -13.4213 -0.38049 53.125 5038
10 5009.048 -6.04839 -0.17147 59.375 5045
11 5028.479 -3.47921 -0.09863 65.625 5061
12 5062.88 28.12019 0.797201 71.875 5062
13 5031.352 47.64792 1.350808 78.125 5065
14 4999.295 65.70467 1.862713 84.375 5079
15 5011.09 -0.08989 -0.00255 90.625 5083
16 5015.777 14.22278 0.403213 96.875 5091
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Discussion on estimated results
Regression analysis is the one of the most important approach that is used to identify
association between varied variables (Adam, Marcet and Nicolini, 2016). By using this approach,
it can be identified that due to change in one variable how much change comes in other variable.
This is the reason due to which this model is used to further deep dive in relationship that exist
between FTSE 100 and Uniliver stock performance. This model is also prepared to identify beta
value that will be taken in to account to compute required rate of return on Uniliver stock. From
the table give above it can be observed that value of multiple R is 0.60 which is indicating that
with increase in market stock price is moderately increased. On other hand, if market decline
stock price also declines. Thus, it can be said that there is moderate correlation between both
variables. It can be said that Uniliver stock is highly sensitive to the index performance. R square
value is 0.36 which means that 36% variation of dependent variable which is Uniliver stock price
is explained by independent variable which is FTSE 100. Means that with change in FTSE 100
we can expect 36% variation in stock price. It can be seen from the table given above that value
of level of significance is 0.01<0.05 which means that there is significant difference between
dependent and independent variable. It can be said that with small change in FTSE 100 index
huge change can be observed in the Uniliver stock price. Coefficient value or beta value is 0.75
which is again indicating that high rate of variation comes in Uniliver price due to change in
market index. Thus, it can be assumed that charts in previous section and statistics in above table
are indicating same thing that in case FTSE 100 decline investors show bearish behaviour and
start selling their positions in the stock market and in case index value surged investors see
buying opportunity and become bullish on stocks. Thus, it can be concluded that investors mood
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in respect to purchase sell of Uniliver stock is heavily dependent on index performance in the
market.
Required rate of return using CAPM model
Table 1CAPM calculation
RFR 2%
Market return 0.23%
Beta 0.756057
Required rate of return 0.66%
Interpretation
CAPM is known as capital asset pricing model. In order to do computation some of
variables are required like risk free rate of return, market expected return and beta (Dimpfl and
Jank, 2016). It can be observed from above table that required rate of return for Uniliver stock is
0.66% which means that investor must earn this percentage return in every condition for risk it is
taking by making investment in Uniliver shares. Thus return above 0.66% will be reward for the
investor for taking such a big risk of making investment in relevant company shares.
Calculation of Intrinsic Value of Unilever
Intrinsic Value can be defined as the valuation of company stock price by using the
theoretical method i.e. Gordon Growth Method (Parker, and et.al., 2018). This is done in order to
know the difference between the theoretical price of share and current market price of Unilever
prevailing in the market.
Calculation of theoretical stock price of Unilever
Theoretical price of Unilever = 1.63/(9.13%-8.69%)*100
= £37045
Working Notes:-
Note 1:-Calculation of D 1 = 1.50*(1.0869) = 1.63
Note 2:-Calculation of weighted average cost of capital
Year 2018
Total capital and
Debt (£) Weight (%) Cost Weight* Cost
Debt 40180 77.64% 1.70% 1.32%
Equity 11572 22.36% 34.93% 7.81%
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Total 51752 100.00% 9.13%
From the above theoretical price of Unilever and current market price is states that the
stock of Unilever is overvalued. At this point of time investor should not invest in the share price
because the share price of company can be fallen and investor may cause huge. It is advisable to
investor to sell the share of the company in order to gain higher profits because price of Unilever
is overvalued.
CONCLUSION
Unilever is having overvalued stock price which shows that the investor should sell the
shares of company and should not purchase more shares of the company. From the above report
it can be summarized that there are different methods of calculating Dividend such as Gordon
Growth model. This model helps in knowing the theoretical price of share which helps in
comparing the theoretical price with current price of Unilever. This model help in knowing the
investor that whether the companies share are overvalued or undervalued. Index market returns
and Unilever's returns are positively correlated to each other which shows that if there are any
changes in index returns than there will be positive change in the returns of Unilever . Required
rate of return on equity is also calculated using CAPM model.
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REFERENCES
Books and Journals
Adam, K., Marcet, A. and Nicolini, J.P., 2016. Stock market volatility and learning. The Journal
of Finance. 71(1). pp.33-82.
Dimpfl, T. and Jank, S., 2016. Can internet search queries help to predict stock market
volatility?. European Financial Management. 22(2). pp.171-192.
Dividend Discount Model (DDM). 2017. [Online]. Available through :
<https://www.wallstreetmojo.com/dividend-discount-model/>.
Michaely, R., Rossi, S. and Weber, M., 2018. The information content of dividends: Safer
profits, not higher profits (No. w24237). National Bureau of Economic Research.
Mwangi, W.M., 2017. Testing the Gordon’s Growth Model. Research Journal of Finance and
Accounting, 8.
Parker, P. D., and et.al., 2018. An information distortion model of social class differences in
math self-concept, intrinsic value, and utility value. Journal of Educational
Psychology. 110(3). p.445.
Piatti, I. and Trojani, F., 2019. Dividend Growth Predictability and the Price–Dividend
Ratio. Management Science.
Unilever Analysis — Warren Buffett Valuation. 2017. [Online]. Available through :
<https://medium.com/@halkingroup/unilever-analysis-warren-buffett-valuation-
7824b77edb3b>.
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