CSC's Chen Guo: Exploring Three Dividend Pricing Models

Key Points

There are three pricing methods for dividend assets: stock-bond yield spread, absolute growth rate, and relative earnings. Each has its own advantages, disadvantages, and applicable environments. Qualitatively, the upward trend in dividend earnings (expectations) is an important support factor for relative returns, and the subsequent changes to be vigilant about include demand recovery, bottoming out of production capacity cycles, and the start of the technology cycle. Quantitatively, with reference to the stock-bond yield spread and absolute growth rate pricing methods, there is still room for dividend style at present.

Main Content

The high dividend market has been going on for more than two years. There have been various explanations for the significant outperformance of high dividend assets this year. It is the result of various factors such as funds and profits. We aim to further explore and analyze the sustainability and valuation rationality of the market from the perspective of three pricing models.

Stock-Bond Yield Spread Pricing Method: The view is that using the CSI Dividend Index to represent high dividend assets, the high stock-bond yield spread (>3%) relative to the 10-year government bond yield will continue to attract capital inflows. An overheated market is indicated by the stock-bond yield spread reconverging to historical lows. Currently, in an asset shortage environment, the dividend yield level of the CSI Dividend Index at 5.5%+ is attractive. However, in an environment where asset growth expectations are generally reduced and risk premiums are rising, the traditional stock-bond yield spread and stock-bond yield differential framework may not be effective, or it may be difficult to return to historical average levels. To eliminate the impact of valuation downgrades and rising asset risk premiums, the stock-bond yield spread of the highest quality dividend assets such as Changjiang Electric can be used as a preliminary anchor. From the perspective of the three-year mean standard deviation system, if the Changjiang Electric stock-bond yield spread (TTM) touches the three-year mean -1/-2 times standard deviation, it roughly corresponds to 10%/25% market space; calculated using the 24-year expected stock-bond yield spread method, if it touches the three-year mean -1/-2 times standard deviation, it roughly corresponds to 35%/50% market space in the next year. It should be noted that the stock-bond yield spread pricing method does not consider the impact of fundamental factors and valuation rationality, and its applicability is very limited.

Absolute Growth Rate Pricing Method: If the dividend payout ratio, growth rate, and expected stability of enterprise asset quality risks remain stable, the valuation center of high dividend assets remains unchanged, and the reasonable price increase is roughly equal to the expected profit space. An overheated market is indicated by the stock price increase significantly exceeding the expected profit growth rate. Although there are many assumptions and idealizations, the absolute growth rate pricing method can still be used for sensitivity analysis to judge the price space under different scenarios. Taking the CSI Dividend Index as an example, assuming the 50% and 75% percentiles of PE (TTM) since 2016 as the reasonable valuation center, under the 24-year Wind consensus profit expectations, they correspond to market spaces of approximately 15%/25%.

Relative Earnings Pricing Method: Style rotation stems from the comparative price effect between different assets. The increase in the proportion of high dividend earnings is the underlying support for relative returns. An indication that the market trend is ending is a change in the upward trend of the earnings proportion. This pricing model simultaneously covers the effects of capital and fundamental comparative pricing. By observing the changes in the difference between the earnings proportion and market value proportion, the degree of valuation discount/premium can be determined Measured by the difference between the profit proportion and the market value proportion, the overall market value proportion of the CSC Stability Index and the CSI Dividend Index has not shown significant frothiness. However, attention should be paid to certain individual stocks/industries, such as the coal sector where the difference between market value proportion and profit proportion has been above the mean since 2009. Valuation discounts have been largely corrected, and the future trend of market value proportion will depend more on changes in profit proportion. It is important to note that the inflection point of profit proportion is only effective for annual cycles, with limited significance for monthly/quarterly rotation, and the challenge lies in predicting when the inflection point of profit proportion will occur.

When the profit trend (expected) no longer rises, the risk of style switching usually intensifies. Changes to be vigilant about come from three aspects: demand recovery (observing overseas inventory replenishment elasticity after the start of the interest rate cut cycle in the second half of the year, and observing credit expansion in domestic demand), the bottoming out of the production capacity cycle (expected by the end of 2024 to early 2025), and the start of the technology cycle.

Authors of this article: Chen Guo (Practitioner Certificate Number: S1440521120006), Zheng Jiawen (Practitioner Certificate Number: S1440523010001), Source: CSC Securities Research, Original Title: "CSC Securities: Discussion on Three Pricing Models for Dividends"