Hi everyone. As we discussed, forecasting is the process of making informed estimates of future performance using historical data, trends, evaluations of strategic choices, and assessed impacts of macro-economic events. Well, the most important steps in developing an accurate forecast is to determine the appropriate forecast driver. Steps 5 and 8 in the nine steps simple forecast approach. Throughout this video, we'll review examples of selecting the appropriate forecast driver. In scenario 1, we need to forecast earnings per share in dividends over a three-year forecast horizon. Using the following assumptions and historical trends, we'll discuss how to forecast EPS and dividends, and the long term continuing value growth rates. Company guidance has not been provided for future EPS or dividends. The company has grown above market due to patented technology. Patent protection will remain for the next three years. The company has a track record of increasing dividends by five percent per year, delivering consistent increases of five percent per year for the past 10 years. In addition, our view of the financials indicate that earnings per share has grown approximately 10 percent in each of the past three years. Also, GDP has grown three percent, 2.9 percent, 3.8 percent during this time-frame. Based upon these facts and analysis, how should we forecast 2021, 2022, and 2023 growth rates for earnings per share in dividends, and how should we determine the continuing value growth rate for both items? Obviously, we'd always like to have more information to base our forecast upon. However, with limited information available, we believe that the company can continue it's trend of 10 percent EPS growth over the next three-year forecast horizon. It's patent protection will help sustain above market growth. For dividends, the company's track record of a five percent dividend increase over the past 10 years would provide a reasonable basis for forecasting that this trend will continue. As such, we forecast dividends to grow by five percent over the next three years. Finally, limited information makes determining the continuing value growth rate or growth rate beyond the three-year forecast horizon very challenging. However, if we assume that patent protection drops off after year 3, it will likely be difficult for the company to continue the above market growth rate. As such, it would be appropriate to adjust the 10 percent growth rate down to either industry norms or assume that the company will grow in line with the macroeconomic indicators, such as GDP levels, as increased competition will likely impact long-term growth. Moving to scenario 2, again, we need to forecast earnings per share in dividends over a three-year forecast horizon. Using the following assumptions in historical trends, we'll discuss how to forecast EPS and dividends and the long-term continuing value growth rates. Company guidance has not been provided for future EPS or dividends. The company incurred significant restructuring cost in 2018 and 2019, and these costs are not expected to continue in the future. The company is a consumer staple. Demand aligns with the overall health of the economy. GDP is estimated to be three to four percent for the next three years. The company has a track record of increasing dividends by five percent per year, delivering consistent increases of five percent per year for the past 10 years. In addition, our review of the financials indicate that EPS has fluctuated significantly over the past three years, declining 7.2 percent in 2018, declining 11.8 percent in 2019, and growing 3.3 percent in the most recent fiscal year. Also, GDP has grown three percent, 2.9 percent, and 3.8 percent during this time-frame. Based upon these facts and analysis, how should we forecast 2021, 2022, and 2023 growth rates for EPS and dividends, and how should we determine the continuing value growth rates for both items? With limited information available, we've determined that it's reasonable to assume that EPS will grow at a rate equal to projected GDP or nearly 3.5 percent. This company is a consumer staple and typically grows at a rate in line with the overall economy. Remember, past financial performance was significantly impacted by restructuring charges. As such, prior year reported trends are not a reasonable basis for our forecast. For dividends, the companies track record of a five percent dividend increase over the past 10 years would provide a reasonable basis for forecasting this continued trend. As such, we forecast dividends to grow five percent over the next three years. Finally, determining the continuing value growth rate is always challenging. However, since this is a mature company that has experienced historic growth near GDP levels absent unusual events or restructuring charges, it would be reasonable to assume that growth aligned with the macroeconomic indicator, such as GDP, would be a reasonable assumption for the continuing value forecast.
