Abnormal Pakistan Stock Exchange: Dividend Discount Model

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Pakistan is a troubled country. It does not have stable policies and plans and as a result it does not have stable economy. You cannot expect steadiness from Pakistani economy. There are sudden and unexpected changes. This is why most of financial, economic and statistical models fail here because the fundamental thing that makes these models useful, lacks here and that is stability and steadiness.

For instance take Dividend Discount Model. It is a very popular model of stock valuation. It gives you present value of a stock based on three variables: dividend, discount rate and growth rate.

PV = Dividend per share / ( Discount Rate – Dividend Growth Rate)

Take dividends. In last 365 days, 71 companies out of top hundred PSX companies did not give dividend. You know what it means, zero divided by anything is zero.

Then discount rate. It is the cost of equity. You can use Required Rate of Return here calculated through CAPM model.

RRR = Risk-free Rate of Return x Beta (Risk Premium)

But Risk Premium is negative for last 365 days because stock exchange is down and returns are also negative.

Finally Dividend Growth Rate. Out of remaining 29 companies, growth rate of eighteen (18) companies is negative. They paid less dividends recently as compared to previously paid dividends.

So when you will try to calculated stock valuation of PSX companies based on DDM, you’ll get a lot of surprises.

See calculations here.



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