Dividends and Stock Valuation: A Study from the Nineteenth to the Twenty-First Century

50 Pages Posted: 14 Mar 2006

See all articles by Stephen R. Foerster

Stephen R. Foerster

University of Western Ontario - Richard Ivey School of Business

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business

Date Written: March 13, 2006

Abstract

Using a comprehensive database of monthly U.S. economic and price-based factors from 1871 to 2005, we investigate the relationship between the actual values and our estimated intrinsic values of the S&P Composite Index. We estimate the intrinsic value using the most fundamental valuation technique, the dividend discount model based on an estimated 30-year rolling equity premium and corresponding cost of equity combined with perfect foresight of dividends. We find that stocks were undervalued, on average, by approximately 26% over the entire sample. Prior to 1945, stocks were consistently undervalued and displayed more bond-like characteristics. Since 1945, stocks were, on average, fairly valued but with long periods of under- and over-valuation. We show that across both periods well-known economic and price-based factors can explain much of the levels and changes in "pricing errors". Over this period the Fed Model also finds equities were under-valued, but its predictive ability decreases when one considers other factors. Because of the concerns surrounding the choice of discount rate in asset pricing research, we compare our estimated cost of equity (using the CAPM) with implied measures from the actual price and dividend series and observe that many of the differences are related to economic conditions.

Keywords: Asset pricing, valuation, dividend discount model, multi-factor models

JEL Classification: G21, G35

Suggested Citation

Foerster, Stephen R. and Sapp, Stephen G., Dividends and Stock Valuation: A Study from the Nineteenth to the Twenty-First Century (March 13, 2006). Available at SSRN: https://ssrn.com/abstract=890445 or http://dx.doi.org/10.2139/ssrn.890445

Stephen R. Foerster (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada
519-661-3726 (Phone)
519-661-3485 (Fax)

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
519-661-3006 (Phone)
519-661-3959 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
533
rank
49,912
Abstract Views
2,333
PlumX Metrics