The share valuation of Marks and Spencers
Marks and Spencer PLC is a UK based group which owns a chain of stores globally. It deals in retail goods which include clothing, food and home ware. It caters to all ages and demographic groups (Marks and Spencer 2010).
Beta (B) represents the market risk involved in transacting a financial instrument. Reuters shows the value of Beta (B) for the stocks of Marks and Spencer PLC at 0.90. This implies that the market risk involved in dealing with the stocks of Marks and Spencer PLC is lower than the industry and competitors involved so the stock is a safe investment (Bloomberg 2010). Dividends announced by the company over the last five years are provided in Appendix I.
The common stock prices of Marks and Spencer PLC are valued by the following approaches
Net Asset Value (NAV): A financial instrument is valued by NAV as follows,
Common stocks price per share = (Total Market Value of all stocks – liabilities)
No. of Common stocks outstanding (Fabozzi 2001).
Common stocks unlike Mutual funds are valued in real time and are bought at premium, market or discounted prices (Bloomberg 2010). The expected market value of common stocks of Marks and Spencer PLC as per NAV is 92.310p (Appendix I). Incase the company defaults on its liabilities every share holder will receive 92.310p against a single common stock after paying its liabilities.
Dividend valuation model (DVM): is based on using historical financial information of Marks and Spencer PLC’s common stocks to calculate the current price of the stock.
With the P0 and D0 given, g calculated by averaging the percentage changes in final dividend in FY 2009 and 10. The value of Required Rate of Return (Ke) will be 0.1152 or 11.52%. The price derived from this is 278.70p (Marks and Spencer 2010; Bloomberg 2010). The Required Rate of Return (Ke) is calculated using CAPM model as follows:
Ke = Rf + β (Rm-Rf)
Ke = 3.5% + 0.9 x (5.5%) = 8.45%
Using Dividend Valuation Model for one period based on the following equation:
P0 = Div1/(1+Ke)+P1/(1+Ke)
The reason for using one period Dividend Valuation Model is due to the estimated required rate of return which is less than the dividend growth rate and therefore, Gordon’s Model may not hold. We have assumed a constant dividend growth rate in our calculation. From this equation, we have a price of 384.88p which implies that if the price is equal to 384.88p or less than investment in the company stock is feasible. Moreover, when Ke is compared to the growth rate of the stock - 11.48% it could be suggested that long term investment in the company’s stock is a viable option.
Price Earnings Ratio (Historical): Appendix I provide comparison of Marks and Spencer PLC’s Price Earnings ratio of the same year with major competitors. The PE ratio of MKS is at 11.46 which is lower than 11.66 (sector PE ratio) in the markets they operate in. Marks and Spencer PLC’s is in a moderate condition than “Next PLC” but is more unstable in comparison to “Tesco PLC”. It crossed the minimal barrier for P/E ratio in the industry (11.1) so the stock is performing reasonably well in the industry. From this analysis it could be suggested shareholders can expect relatively higher returns from their investment in the company’s stock. The company’s NAV is 92.310p indicating return to stock holders even if the company liquidates. The P/E ratio (future) is shown in Appendix II, the P/E Ratio (Future) falls to 287.79 showing a decline in the Price Earnings Ratio from 12.64 (FY 2010). Due to lower EPS the stock is not worth keeping in the portfolio as it will decrease the value of the portfolio and the company is expected to incur reduction in profits (Chisholm and Chisholm 2009).
The stocks of Marks and Spencer PLC show an expectation of growth in the current FY according to their financial statements of FY 2010, since the profit before taxation indicates an increase of £94.6million in the adjusted profit before taxation. The EPS basic and diluted have shown an increase in FY 2010.The net assets show an increase in the company accounts and so does the profit. The stock prices exhibit a rising trend and capital gains can be earned on the stocks in the short term as well. It is also viable for long term investments; according to London stock exchange the dividend payment per share is exhibiting a rise of approximately 5%, showing recovery in dividend payments. With the borrowing decreasing in April 2010 the over all equity of the company is increasing making it financially stable. The half yearly accounts also show increase in revenues in the market segments (LSE 2010; Marks and Spencer 2010).
The ratio analysis of Marks and Spencer PLC is as follows, the group is not performing very well since. The gearing ratios suggest that the company has high proportion of debt to equity. Although, it is earnings sufficient to pay interest but its equity to assets ratio remains quite weak. Also the liquidity position of the company is also weak as values of both current and quick ratio is less than 1 and the company may run into problems to pay its current liabilities effectively.
Profitability ratios: the profitability ratios show comparison between FY 2009 and FY 2010 in the appendix. The ROA has shown an increase showing that the net profit generated per dollar of assets has increased by 0.3% showing better usage of assets. The ROE shows a decline of 0.2 %, showing that the returns given to the common stock holders have declined in FY 2010 (Appendix II).
Investment ratios: the Dividend yield ratio shows a decline of 0.181 in FY 2010, due to decline in the dividend payout. The PE ratio however shows an increase due to increase in share price of the share FY 2010 (Appendix II). .
Therefore, the stocks of Marks and Spencer PLC are expected to perform well with fluctuating returns to stock holders in the short run to investors, who are looking for capital gains.
The recommendation to the board of directors will be to marginally reduce the dividend keeping in mind the market condition and increase its retained earnings to finance its short term liabilities. Further, it needs to boost its Return on Assets (ROA) and Return on Equity (ROE) which has dropped by 0.2 percent. To gain the trust of the stock holders the company will have to communicate to the share holders that the company will payout bigger dividends in the coming period once it stabilizes and captures a greater market share in the sector.
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