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  • Guy Drori

Wise Bird Capital model for Expected Annual Return from investing in shares

There are two simple ways of actual profiting from shares: - Share Price Appreciation - Dividend Received I will walk you through my way of calculating the expected annual return of a share based on those 2 elements: price appreciation and dividend

Our calculation of the expected annual return is the last phase of bigger and more fundamental process we execute for each company we are analyzing.

The process starts with getting all the financial statement of the company P&L, Balance Sheet and Cash Flow from 10-K and 10-Q (this is done with an in-house algorithm we build), then we continue with a deeper analysis of the company and the financials – business, management, segmentation, risks, competition, guidance etc.

Once we get to a point which we understand the company business, results and risks we would conduct a 6 year future forecast for the full P&L down to Net Income.

Once we have completed forecasting the P&L we will utilize the annual expected return model:

The model starts with the expected future Net Income of the company for Year 1 to Year 6.

2nd step is we look at the market cap of the company and current P/E ratio – in the case of our example in above chart, company market cap is $15,000 with a current P/E of 15.

Next, we will estimate or determent future P/E, in the example we used future P/E of 12 – which give us a company Market cap of $19,326 (based on future P/E of 12 multiple by the Year 6 Net Income of $1,611).

3rd step is to calculate the expected dividend the company will pay AND the number of Shares Buy Back (A buyback, also known as a share, repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market) in Year 1 till Year 6.

This is done by estimating the percentage of the net income that will contribute to the Dividend or the Buyback – based on historical cash flow data or guidance from the company’s management.

In our example we took 20% for dividend and 80% for Shares Buy Back (the sum doesn’t need to be equal to 100%) as a general note, the higher those percentage are, the higher is the shareholder return is.

4th step is to calculate the number of share outstanding (Shares outstanding refer to a company's stock currently held by all its shareholders). In the example, current number of shares outstanding are 900 (you can get number from the latest 10-K or 10-Q as the Weighted number of shares diluted number). Then we reduce the number of share outstanding by the amount of shares under the Buyback calculation (total Buyback amount / Share price) – for the year 2 we reduce the share outstanding by 53 shares that was calculate by divide Buyback of $880 by share price of $16.7.

Last step is to calculate future share price by dividing the future market cap by total number of share outstanding in year 6. In our case future share price is calculate by dividing future market cap of $19,326 by number of future shares 578 – equal to share price of $33.5.

If you got till here 😊 what’s left is to conclude the Annual Expected Return by:

Calculate total return =

Year 6 share price expected of $33.5 + total cumulative received dividend form Year 1 until Year 6, in our example this sums to $2.2 = $35.6

Divided by:

Initial Share Price (current price of the share) = $16.7

Total Return sums to 113.7% or 16.4% on an annual basis

Hope you find this model useful and detailed what are the main drivers for returns and deeper insight on the expected returns you can achieve from a specific investment.

You can download the Expected Return Model excel file below

WiseBirdCapital Expected Return Calculation
Download XLSX • 14KB


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