Buffettology (2)

A continuation of the previous article named "Buffettology".

Three ways to calculate the expected return of an long term stock investment:

1) compare current earning yield (i.e. 1/PE) and long term EPS growth rate with long term interest rate
e.g. for HSBC, historical earning yield = 7.7%, and 5 year EPS growth rate = 21%; current 10 year treasury bill yield around 5%

2) by using ROE, dividend payout ratio, book value & range of historical PE ratio.
i) use current book value & long term average ROE * (1-dividend payout ratio) to project future book value;
ii) use projected future book value & long term average ROE to project future EPS;
iii) use projected EPS & range of historical PE ratio to project future stock price;
iv) add dividend pool to projected future stock price and compare with current stock price to estimate expected return.

3) by using EPS, long term earning growth rate & range of historical PE ratio.
i) use current EPS and long term average earning growth rate to project future EPS;
ii) use projected EPS and historical PE ratio to project future stock price;
iii) add dividend pool to projected future stock price and compare with current stock price to estimate expected return.