There are so many ways to calculate so-called “intrinsic value”,...

There are so many ways to calculate so-called “intrinsic value”, and all are so fraught with subjectivity as to suggest the word “intrinsic” should be jettisoned by all except charlatans who wish to misappropriate the sense of concreteness that the word “intrinsic” enjoys in the minds of their intended victims. Subjectivity implies that each guesstimate of value would be unique to each investor, depending on their circumstances, knowledge, risk appetites and the like.

For a long-established, dividend-paying, industrial stock like CCL whose main edge is its trade name, CocaCola, I would simply guesstimate what its dividends are going to be for many years, and work out their NPV – very subjective, so develop a few scenarios to see how sensitive your assumptions are.

Because the Thomson Consensus estimates for CCL are:

. . . . . 2012 . . . 2013 . . 2014 . . . 2015
EPS . 73.4¢ . . 68.3¢ . . 74.0¢ . . 73.2¢
DPS . 59.5¢ . . 56.5¢ . . 63.5¢ . . 55.5¢

I would simply use 60¢ and assume a long-term growth of 3%, 4% and 5%. There is a view that companies should be able to grow DPS by ROE x Earnings Retention Rate, and in CCL's case that is about 5.4%, but there is also a view that in the long term ROE tends to fall, so 5% seems to suffice as a long-term, upper-end growth percentage.

CCL enjoys 75% franking, so we can increase the DPS to 60¢/(1-0.3*0.75) = 77.42¢. Because I am going to base my RRR on my mortgage rate, I should reduce the 77.42¢ to an after-tax metric, so for this exercise I'll assume 33% is lost to the ATO to get an after-tax 51.87¢. Each investor would have a different marginal tax rate, and in a pension-paying SMSF, it is zero.

Currently I can invest in my mortgage, or pull funds out of it, so that is my starting point, 5.4%. One should not simply use that rate, and as research has shown that investors in the USA apply an equity premium of 80%, I'll use 5.4% x 1.8 = 9.72% as my RRR. Every investor's RRR would tend to be unique, but about 10% is not a bad RRR for CCL.

The table below gives different answers for different assumptions:

RRR . . . . 3% Growth . 4% Growth . 5% Growth
9.72% . . . . . . $7.71 . . . . . $9.05 . . . . . $10.93
10.00% . . . . . $7.41 . . .. . . $8.63 . . . . . $10.34
9.00% . . . . . . $8.64 . . . . $10.34 . . . . . $12.82
8.00% . . . . . . 10.34 . . . . $12.83 . . . . . $16.70
7.00% . . . . . $12.83 . . . . $16.72 . . . . . $23.24
6.00% . . . . . $16.74 . . . . $23.30 . . . . . $35.24

At circa $12.00, CCL seems expensive to me using an RRR of 9.72%, which, if anything, is on the low side as an RRR. I would not consider buying CCL at above about $8.50. I have in the past applied this approach to WOW, and it gave a number fairly close to WOW's SP at the time.