Collecting Basic Data on a Stock

Step 3: Where Do Growth Estimates Come From?

The simplified valuation approach requires estimates of next year's earnings and dividends per share. You can either come up with your own estimates, based on the historical growth rate, or use outside information sources for estimates.

How can you come up with your own estimates? First, you need to determine the historical growth rate over the past five years, using the historical per share data from the worksheet. The formula is presented in the equation in Figure 1.

Next year's earnings and dividends per share can then be estimated by multiplying the current year's earnings and dividends per share by 1.00 plus the growth rate. (This formula is also presented in the equation in Figure 1.

Estimates of next year's earnings and earnings growth can also be obtained from outside sources such as Value Line, which derives its own estimates (and which also estimates dividends for the next year), or from consensus reports. In consensus reports, a large number of analysts are periodically polled and asked for their estimates of earnings per share for the next few years, along with estimates of long-term growth rates. Table 2 presents sources for these estimates.

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