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BUSINESS
Intrinsic Value of a Stock: What It Is and Formulas to Calculate It
Reviewed by Gordon ScottFact checked by Ariel Courage
What Is the Intrinsic Value of a Stock?
Intrinsic value is a philosophical concept in which the worth of an object or endeavor is derived in and of itself, independently of other extraneous factors. Financial analysts build models to estimate what they consider to be the intrinsic value of a company’s stock outside of what its perceived market price might be on any given day.
The discrepancy between market price and an analyst’s estimated intrinsic value becomes a measure of investing opportunity. Those who consider such models to be reasonably good estimations of intrinsic value and who would take an investing action based on those estimations are known as value investors.
Some investors prefer to act on a hunch about the price of a stock without considering its corporate fundamentals. Others might base their purchase on the price action of the stock regardless of whether it’s driven by excitement or hype. But there’s another way to figure out the intrinsic value of a stock. It reduces the subjective perception of a stock’s value by analyzing its fundamentals and determining its worth and how it generates cash.
Key Takeaways
- Intrinsic value refers to a fundamental, objective value contained in an object, asset, or financial contract.
- It may be a good buy if the market price is below this value or a good sale if it’s above it.
- There are several methods for arriving at a fair assessment of a share’s intrinsic value.
- Models utilize factors such as dividend streams, discounted cash flows, and residual income.
- The values estimated by the model will deviate from the true intrinsic value if the assumptions used are inaccurate or erroneous.
Dividend Discount Models
Cash is king when you’re figuring out a stock’s intrinsic value. Many models calculate the fundamental value of a security factor in variables that largely pertain to cash such as dividends and future cash flows. They utilize the time value of money (TVM).
One popular model for finding a company’s intrinsic value is the dividend discount model (DDM). The basic formula of the DDM is:
Value of stock=(CCE−DGR)EDPSwhere:EDPS=Expected dividend per shareCCE=Cost of capital equityDGR=Dividend growth rate
Important
Intrinsic value may also refer to the in-the-money value of an options contract.
One variety of this dividend-based model is the Gordon Growth Model (GGM). It assumes that the company in consideration is within a steady state with growing dividends in perpetuity. It’s expressed as:
P=(r−g)D1where:P=Present value of stockD1=Expected dividends one year from the presentR=Required rate of return for equity investorsG=Annual growth rate in dividends in perpetuity
It accounts for the dividends that a company pays out to shareholders, as the name implies. This reflects on the company’s ability to generate cash flows. There are multiple variations of this model, each of which factors in different variables depending on what assumptions you want to include. The GGM has its merits when applied to the analysis of blue-chip companies and broad indices despite its very basic and optimistic assumptions.
Residual Income Models
The residual income model is another method of calculating this value. In its simplest form, it’s expressed like this:
V0=BV0+∑(1+r)tRItwhere:BV0=Current book value of the company’s equityRIt=Residual income of a company at time period tr=Cost of equity
The key feature of this formula lies in how its valuation method derives the value of the stock based on the difference in earnings per share and the per-share book value to arrive at the intrinsic value of the stock. Book value is the security’s residual income in this case.
The model seeks to find the intrinsic value of the stock by adding its current per-share book value with its discounted residual income. This can either lessen the book value or increase it.
Discounted Cash Flow Models
The most common valuation method used to find a stock’s fundamental value is the discounted cash flow (DCF) analysis. It resembles the DDM in its simplest form:
DCF=(1+r)1CF1+(1+r)2CF2+(1+r)3CF3+⋯(1+r)nCFnwhere:CFn=Cash flows in period nd= Discount rate, Weighted Average Cost of Capital (WACC)
You can determine a fair value for a stock based on projected future cash flows using DCF analysis. Unlike the previous two models, DCF analysis looks for free cash flows, those that exclude the non-cash expenses of the income statement such as depreciation and include spending on equipment and assets as well as changes in working capital. This model also uses WACC as a discount variable to account for the TVM.
Why Intrinsic Value Matters
Analysts employ the methods used in these models to determine whether the intrinsic value of a security is higher or lower than its current market price. This allows them to categorize it as overvalued or undervalued. Investors can typically determine an appropriate margin of safety when calculating a stock’s intrinsic value in which the market price is below the estimated intrinsic value.
You can limit the amount of downside you would incur if the stock ends up being worth less than your estimate if you leave a cushion between the lower market price and the price you believe it’s worth.
Suppose you find a company that you believe has strong fundamentals coupled with excellent cash flow opportunities. It trades at $10 per share in that year. After figuring out its DCF, you realize that its intrinsic value is closer to $15 per share, a bargain of $5.
You would purchase this stock at the $10 value, assuming you have a margin of safety of about 35%. You’re still saving at least $2 from your initial DCF value if its intrinsic value drops by $3 a year later. You’ll have ample room to sell if the share price drops with it.
Intrinsic value is a vital concept to remember when researching firms and finding bargains that fit within your investment objectives. It’s not a perfect indicator of the success of a company but applying models that focus on fundamentals provides a sobering perspective on the price of its shares.
How Do You Find the Intrinsic Value of a Stock?
Calculate the company’s future cash flow then calculate the present value of the estimated future cash flows. Add up all the present values to arrive at the intrinsic value.
How Do You Know If a Stock Is Undervalued?
You can determine whether a stock is undervalued in a few ways. One method is to look at a company’s price-to-earnings (P/E) ratio, which is its stock price divided by its earnings per share. A company may be undervalued if its P/E ratio is below that of its competitors or the overall market.
What’s the Difference Between Market Value and Intrinsic Value?
Market value is the current stock price of a company. It’s based on supply and demand and can fluctuate due to many factors such as opinions and feelings. Intrinsic value is a company’s true value. It can be thought of as the actual worth of a company when taking the value of its assets and liabilities into consideration.
The Bottom Line
Every valuation model developed by an economist or financial academic is subject to the risk and volatility that exists in the market as well as the sheer irrationality of investors. Calculating intrinsic value may not be a guaranteed way of mitigating all losses to your portfolio but it does provide a clearer indication of a company’s financial health.
Value investors and others who prefer to select investments based on business fundamentals consider this indication to be a vital component for successfully picking stocks that are intended for long-term holdings. Choosing stocks with market prices below their intrinsic value can help save money when building a portfolio.
A stock may be climbing in price in one period but it may be best to wait until the market brings it down below its intrinsic value if it appears overvalued. This not only saves you from deeper losses but it also allows for some wiggle room to allocate cash into other, more secure investment vehicles such as bonds and T-bills.
Disclosure: Investopedia does not provide investment advice; investors should consider their risk tolerance and investment objectives before making investment decisions.
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Barclays Bank CD Rates: May 2024
With no minimum deposit requirements and extra-high interest rates, Barclays is a top contender for the best CDs today
Fact checked by Michael Rosenston
Barclays CD Rates
Barclays is a 300-year-old British bank trying to stay globally relevant in modern times, and its CDs are a good-faith effort to that effect. Barclays Bank CD rates are exceptionally good, and many people will appreciate its simple, straightforward options that don’t require a magnifying glass to piece apart.
Barclays Bank offers several different term lengths for its online CDs in the United States market.
Barclays Online CD Overview
CD Term | APY | Minimum Deposit |
6 months | 4.85% | None |
1 year | 5.00% | None |
18 months | 4.50% | None |
2 years | 4.00% | None |
3 years | 3.50% | None |
4 years | 3.50% | None |
5 years | 3.75% | None |
See the best CD rates today before choosing the CD that is best for you.
Barclays Bank CDs: Key Features
APY Range | 3.50%–5.00% |
Minimum Deposit | None |
Term Range | 6 months to 5 years |
Early Withdrawal Penalty | 90 days’ interest for terms of two years or less 180 days’ interest for terms over two years |
Grace Period for Penalty-Free Withdrawals | 14 days |
Technically speaking, there is no minimum deposit required to open a Barclays CD. But in reality, the bank won’t post interest to your account unless you’d earn at least one full cent in interest each month.
If you only deposit one cent, for example, the money would stay in the account but Barclays wouldn’t credit any new interest to your account no matter how many times you renew it.
Use a CD interest calculator to check how much total interest you’d earn with one of Barclays Bank CD rates, based on the deposit amount you wish to make.
Compare CD Account Rates
Barclays Bank CD rates are exceptionally high even compared to global competitors like Chase Bank. And given that it has no real minimum deposit requirement, that’s an especially strong mark in its favor, especially if you don’t mind opening an account at a new bank in order to take advantage of good rates on its CDs.
Important
Some people prefer opening CDs and savings accounts at other banks because it “hides” the account from themselves, making it easier to avoid the temptation to withdraw the money early.
Is a Barclays CD Worth It?
Yes, a Barclays CD is a very good option if you’re looking to earn the highest rates possible and if you don’t mind opening a CD account at a new bank. For more CDs with high APYs, see the best CD rates currently available today.
Does Barclays Have a Minimum Deposit for CD Accounts?
No, Barclays doesn’t have a minimum deposit for its CD. But Barclays does require that you deposit enough to earn at least $0.01 in interest each month—otherwise, the bank won’t post any interest at all to your account and it’ll be stuck in an interest-free limbo until it matures.
What Is the Best Term Length for Barclays CDs?
Barclays Bank CD rates are currently the highest for its one-year term length option. Normally rates are higher on the longest-term CDs. But given the strange high-interest-rate environment we’re currently in, many banks have reversed that pattern, likely so they’re not stuck paying ultra-high rates when they go back down in the future.
Are Barclays CD Accounts FDIC-Insured?
Yes, Barclays CDs are FDIC-insured. Just remember to keep your total deposits with Barclays under $250,000, which is the limit of FDIC insurance for all of your deposits at any particular bank.
Your Guide to CDs
- What Is a Certificate of Deposit (CD)?
- What Is a Brokered CD?
- What Is a CD Ladder?
- Pros and Cons of CDs
- How to Invest With CDs
- How to Open a CD
- How to Close a CD
- CDs vs. Annuities
- CDs vs. Stocks
- CDs vs. Mutual Funds
- CDs vs. ETFs
- CDs vs. Savings Accounts
- Short-Term vs. Long-Term CDs
- CD Rates News
- Best 1-Year CD Rates
- Best 18-Month CDs
- Best Jumbo CD Rates
- Best 6-Month CD Rates
- Best 3-Month CD Rates
- Best Bank CD Rates
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Charles Schwab’s total client assets dip 3% during tax season
Money manager cites “client tax disbursements and seasonal advisory fee payments” for drop.
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7 Ways to Recession-Proof Your Life
Reviewed by Somer Anderson
There are many everyday habits that the average person can implement to protect themselves from the sting of a recession or even make it so that its effects aren’t felt at all. As the recession hits, these tools can help you get through it in one piece financially.
Key Takeaways
- Individuals can develop habits that will protect them ahead of time, even if an economic slowdown or recession takes hold.
- In terms of income, having an emergency fund, strong credit, multiple sources of income, and living within your means are all important.
- In terms of investments, individuals need to think long-term and diversify holdings, as well as be realistic about how much risk they can handle.
Have an Emergency Fund
If you have plenty of cash lying around in a high-interest, Federal Deposit Insurance Corp. (FDIC)-insured account, not only will your money retain its full value in times of market turmoil, but it will also be extremely liquid, giving you easy access to funds if you lose your job or are forced to take a pay cut.
Also, if you have your own cash, you will be less dependent on borrowing to cover unexpected costs or the loss of a job. Credit availability tends to dry up quickly when a recession hits. Once these things happen, use your emergency fund to cover necessary expenses, but keep your budget tight on discretionary spending in favor of making that emergency fund last and restoring it ASAP.
Live Within Your Means
If you make it a habit to live within your means each and every day during the good times, you are less likely to go into debt when gas or food prices go up and more likely to adjust your spending in other areas to compensate.
Debt begets more debt when you can’t pay it off right away—if you think gas prices are high, wait until you’re paying a 29.99% annual percentage rate (APR) on them by fueling up on a credit card.
To take this principle to the next level, if you have a spouse and are a two-income family, see how close you can get to living off of only one spouse’s income. In good times, this tactic will allow you to save incredible amounts of money—how quickly could you pay off your mortgage, or how much earlier could you retire, if you had an extra $40,000 a year to save?
In bad times, if one spouse gets laid off, you’ll be OK because you’ll already be used to living on one income. Adding to your savings will stop temporarily, but your day-to-day frugal spending lifestyle can continue as normal.
Note
You’re only charged interest on credit cards if you don’t pay off your entire balance every month. So if you’re paying only the minimum amount required, your credit card debt will grow.
Have Additional Income
Even if you have a great full-time job, it’s not a bad idea to have a source of extra income on the side, whether it’s some consulting work or selling collectibles on eBay. More jobs mean more job security. Diversifying your streams of income is at least as important as diversifying your investments.
Once a recession hits, if you lose one stream of income, at least you still have the other one. You may not be making as much money as you were before, but every little bit helps. You may even come out the other end of the recession with a growing new business as the economy turns up.
Invest for the Long Term
So what if a drop in the market brings your investments down 15%? If you don’t sell, you won’t lose anything. The market is cyclical, and in the long run, you’ll have plenty of opportunities to sell high. In fact, if you buy when the market’s down, you might thank yourself later.
That being said, as you near retirement age, you should make sure that you have enough money in liquid, low-risk investments to retire on time and give the stock portion of your portfolio time to recover. Remember, you don’t need all of your retirement money when you retire—just a portion of it. It might be a bear market when you’re 66, but it could be a bull market by the time you’re 70.
Be Real About Risk Tolerance
Yes, investing gurus say that people in certain age brackets should have their portfolios allocated a certain way, but if you can’t sleep at night when your investments are down 15% for the year and the year isn’t even over, then you may need to change your asset allocation. Investments are supposed to provide you with a sense of financial security, not a sense of panic.
But wait—don’t sell anything while the market is down, or you’ll set those paper losses in stone. When market conditions improve, it is time to trade in some of your stocks for bonds or trade in some of your risky small-cap stocks for less volatile blue-chip stocks.
If you have extra cash available and want to adjust your asset allocation while the market is down, you may even be able to profit from infusing money into temporarily low-priced stocks with long-term value. Buy low so that you can sell stocks high later or hold on to them for the long run.
Be careful not to overestimate your risk tolerance, as that will cause you to make poor investment decisions. Even if you’re at an age where you’re “supposed to” have 80% in stocks and 20% in bonds, you’ll never see the returns that investment advisors intend if you sell when the market is down. These asset allocation suggestions are meant for people who can hang on for the ride.
Diversify Your Investments
If you don’t have all of your money in one place, your paper losses should be mitigated, making it less difficult emotionally to ride out the dips in the market. If you own a home and have a savings account, you already have a start: You have some money in real estate and some money in cash.
In particular, try to build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (like stocks and bonds). This also means that you should consider asset classes and stocks in businesses that are unrelated to your primary occupation or income stream.
Keep Your Credit Score High
When credit markets tighten, if anyone is going to get approved for a mortgage, a credit card, or another type of loan, it will be those with excellent credit. Things like paying your bills on time, keeping your oldest credit cards open, and keeping your ratio of debt to available credit low will help keep your credit score high.
Important
Having a very good to exceptional credit ranges from 740 to 850. Try and stay within this range.
When times are tough, maintain communications with your creditors to keep them happy by making arrangements to keep your accounts in good standing. Many lenders and businesses would rather see you continue to be a customer than have to write off your account as bad debt.
What Is a Recession?
A recession means a significant decline in general economic activity. The macroeconomic term has traditionally been recognized as two consecutive quarters of decline, as reflected by gross domestic product (GDP) and other indicators such as unemployment. However, the National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity lasting more than a few months—normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales.
How Can I Prepare Financially for a Recession?
There are many everyday habits that you can implement to protect yourself ahead of time from the sting of a potential economic downturn or recession. Having an emergency fund, strong credit, multiple sources of income, and living within your means are all important tools that can help you get through a rough patch in the economy in one piece financially.
How Can I Make My Investment Portfolio More Resistant to a Recession?
In terms of investments, being prepared for a recession involves taking a long-term approach to your investment goals, diversifying your holdings, and remaining realistic about your risk tolerance.
The Bottom Line
The key to riding out a recession starts with planning for the worst-case scenario. Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score. Once a recession does hit, it’s smart to look for a side gig to keep money coming in.
Read the original article on Investopedia.
How United Airlines Makes Money
Passenger travel accounts for nearly all company revenue.
Reviewed by Thomas Brock
United Airlines Holdings Inc. (UAL) is a holding company whose principal subsidiary is United Airlines Inc., which provides air transport for people and cargo worldwide. United has hubs throughout the U.S. and service to Europe, Asia, Latin America, Africa, the Middle East, and the Pacific. United Airlines is a member of Star Alliance, a global airline network.
Key Takeaways
- United Airlines provides international and regional transport for people and cargo.
- Company revenue grew nearly 20% in 2023 over 2022.
- United obtains revenue from third-party businesses like credit card points through its partnership with JP Morgan Chase Bank.
United Airlines’ Industry
United deploys aircraft throughout its global network through a single route scheduling system to maximize its value. The company supports three segments: passenger, cargo, and other. United’s primary competitors include Delta Air Lines Inc. (DAL) and American Airlines Group Inc. (AAL).
- Passenger: United’s passenger revenue is generated from ticket sales for passengers throughout its network. The company recognizes passenger revenue when transportation is provided. This category includes ancillary fees such as premium seats, baggage, inflight amenities, and other ticket-related fees.
- Cargo: United’s cargo revenue is generated from the company’s freight and mail services business. These services are provided to commercial businesses, freight forwarders and logistic firms, and the United States Postal Service.
- Other: United obtains revenue from third-party businesses, which includes maintenance services, flight academy, frequent flyer award non-travel redemptions, and ground handling.
15,445
The number of pilots employed by United Airlines in 2023.
United Airlines’ Financials
In Feb. 2024, United Airlines announced financial results for its fiscal year (FY) ending Dec. 31, 2023. The company generated $53.7 billion in total revenue in 2023.
Passenger revenue increased 22.5%, in 2023 compared to 2022, primarily due to increased capacity. Cargo revenue decreased 31.1% in 2023 due to increased market capacity and rate pressures. Third-party revenue increased 15.4% in 2023 due to increased mileage earnings from non-airline partners, including credit card spending and new member acquisitions with credit card partner, JPMorgan Chase Bank, N.A.
History and Leadership
In 1931, four companies Boeing Air Transport, Pacific Air Transport, National Air Transport, and Varney Air Lines, merged to form United Air Lines. From 1934 to 1966, William A. Patterson led United Air Lines to develop domestic service, pioneering the coast-to-coast route from New York to San Francisco via Chicago nicknamed the “Main Line.” United Air Lines became United Airlines in 1975.
As of 2024, Scott Kirby is the Chief Executive Officer (CEO) of United Airlines. He served as president from 2016 to 2020 and was elected to his current position in Dec. 2020.
Recent Developments
In 2023, United implemented its “United Next” plan to drive future growth and enhance the customer experience. United exercised options to purchase 50 Boeing 787-9 aircraft scheduled for delivery between 2028 and 2031. United exercised the rights for 60 A321neo aircraft scheduled for delivery between 2028 and 2030.
United launched an agreement with JPMorgan Chase Bank and its MileagePlus credit card. In 2023, nearly 7.4 million MileagePlus flight awards were used on United Airlines, representing 8.1% of United’s total revenue passenger miles.
How Many Destinations Does United Airlines Support?
United Airlines flies to over 210 destinations in the U.S. and 120 destinations internationally.
Where Are the Main Hubs of United Airlines Located?
The main U.S. hubs are in Chicago, Denver, Houston, New York/Newark, Los Angeles, San Francisco and Washington, D.C.
How Many Employees Does United Airlines Have?
As of 2023, United Airlines employed 103,218 individuals.
The Bottom Line
United Airlines generates revenue through passenger travel, cargo transport, and other third-party partnerships. In 2023, total revenue was $53.7 billion, a nearly 20% increase over 2022. The company employs over 100,000 individuals and operates over 4,500 flights daily.
Read the original article on Investopedia.
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Liquity V2 will allow borrowers to set their borrowing costs, a novel approach in DeFi, and pays the lion’s share of protocol revenues back to liquidity providers.
Bud Light boycott may be losing steam as beer brand holds on to more store shelf space than expected: analyst
Bud Light will continue losing shelf space this summer in the wake of last year’s boycott of the brand, which stemmed from a promotion featuring transgender influencer Dylan Mulvaney, but it won’t lose as much as expected, according to one analyst.
Alibaba’s stock slumps after another profit miss
Alibaba edged past revenue expectations for its latest quarter but fell short on profit, sending its stock lower in Tuesday’s premarket action.