Miquela Anderson

Instructor Kinnear
FIN 311
September 28, 2021

Project Stock Valuation for Oneok, Inc. (OKE)

Calculating the intrinsic value of Oneok’s stock using the CAPM pricing model and
Constant Dividend Growth Model with an Infinite Time Horizon are both subjective
methods used to determine a stock’s price. The values derived from the CAPM model and
the Dividend Growth Model are different for a variety of reasons.

At the time this report was written, Oneok’s current stock price was $57.47. When
pricing Oneok, Inc. using the CAPM pricing model, I derived an expected return of 18.2629%
(see attached Excel worksheet for all calculations). This percentage was on par with Oneok’s
past five-year return of 19.68%. In this instance, Oneok has a Beta of 1.99. This indicates
that the stock is a risky stock since a Beta greater than 1 is more exposed to systematic,
market-wide risk. Therefore, an expected return of 18.2629% would be anticipated since it
is greater than the average S&P500 Index five-year return rate of 9.64%. Intrinsically, the
greater the risk, the greater the expected return. Since the CAPM pricing model measures
the stock’s Beta and takes into account the risk-free rate, we are better able to determine
whether or not a stock’s value and returns are in balance with its overall level of risk.

Conversely, the Constant Dividend Growth Model with an Infinite Time Horizon
measures Oneok’s stock value in comparison to its dividends, which we assume grow at an
infinitely constant rate. The price I derived from this pricing model was $40.63, which was
less than the actual price of the stock of $57.47. In constructing my formula, I calculated the
average dividend growth rate to be 4.86% over a period of 3 years. The price of $40.63
would be considered the fair value of Oneok’s stock given today’s current market
conditions. Since the current stock price is $57.47, this stock appears to be overvalued
under this model.

The advantages of the CAPM pricing model are that it is a simple approach to
calculate the time value of money, it measures the incentive for taking on additional risk,
and gauges the total amount of risk an investor is taking on. It also takes into account
systematic risk by accounting for a stock’s Beta, which is excluded from the Constant
Dividend Growth Model with an Infinite Horizon. Beta proves to be an important variable in
valuing a stock because it accounts for unpredicted risk. Moreover, CAPM assumes that the
investor holds a diversified portfolio, which disregards unsystematic risk from the equation.

On the other hand, the disadvantages of the CAPM pricing model are that it derives
several assumptions that may not hold true in actuality. CAPM assumes that the risk-free
rate holds constant throughout the life of the investment time horizon. This is unrealistic in
that government security rates change frequently. Also, the market risk premium is a
theoretical value. Even using historical index returns, such as the S&P500 Index, to provide
for a comparable substitute, this still may not serve as an unflawed, precise comparison.
Additionally, these are historical market projections, not future projections, which may not
be representative of the market since conditions constantly change. Lastly, CAPM assumes
that all future cash flows can be estimated for the discounting process and the future return
of a stock’s value.

The advantage of the Constant Dividend Growth Model with an Infinite Time
Horizon is that it proves to be a simple formula, which is easiest to comprehend when
calculating a firm’s stock price. As a result, this method demonstrates a quicker and more
efficient way to compare and contrast many companies across varying sectors and of
differing sizes.

Equally, the disadvantages of this model are that the stock price derived from the
formula is touchy to the dividend growth rate of a stock. Moreover, the growth rate cannot
exceed the required rate of return. Otherwise, the value of the stock will be a negative
value. As a result, this may skew results giving an investor an unrealistic depiction of a
company’s stock.

Oneok’s three main competitors include OGE Energy, Targa Resources, and The Williams
Companies. The following data below includes the Price-to-Earnings, Price-to-Sales, and the
Price-to-Free-Cash-Flow ratios I calculated in the attached Excel spreadsheet.

 P/E Ratios:
o Oneok- 19.03
o OGE Energy- 16.55
o Targa Resources- 60.32
o The Williams Companies- 27.82
 Competitor Group Average: 22.19 (excluded Targa from competitor
average)

Oneok’s price-to-earnings ratio (P/E) of 19.03 fell closely to its competitor group average
of 22.19. Since Oneok’s actual stock price of $57.47 tells us very little of how expensive the
stock actually is, the P/E ratio helps compare the price of a company’s stock to its earnings.
It also tells an investor how long it will take for them to double their money. A high P/E ratio
indicates a stock is more expensive in relation to its earnings and may be overvalued,
whereas a low P/E ratio means the stock is less expensive in relation to its earnings and may
be undervalued. In this case, Oneok’s P/E ratio of 19.03 tells us that the stock is valued
appropriately given our current market conditions and that it will take an investor 19.03
years to double their overall investment compared to the group average of 22.19 years. A
lower P/E ratio, such as Oneok’s, also indicates that the company is stable and more
mature. Using the competitor group average P/E ratio, the implied stock price of Oneok’s
stock price came out to be $67.01- above its actual stock price of $57.47.
 P/S Ratios:
o Oneok- 2.26
o OGE Energy- 1.94
o Targa Resources- 0.99
o The Williams Companies- 3.59
 Competitor Group Average: 2.17

The price-to-sales ratio (P/S) measures how much an investor pays for a company’s
stock per dollar of its sales. Oneok’s P/S ratio was 2.26- only slightly higher than the
competitor group average of 2.17. Generally, a P/S ratio of less than or equal to 1 is
considered to be ideal, whereas a P/S ratio between 1 to 2 is considered to be positive. In
this instance, we can see that Oneok’s P/S ratio is somewhat unfavorable along with The
Williams Companies. This may indicate that Oneok’s stock is slightly overvalued, while the
Williams Companies’ stock is significantly overvalued. Using the competitor group average
P/S ratio, Oneok’s implied stock price came out to be $55.17, which was very near to the
actual stock price of $57.47.

 P/FCF Ratios:
o Oneok- 16.81
o OGE Energy- (6.57)
o Targa Resources- 8.76
o The Williams Companies- 12.14
 Competitor Group Average: 4.78

The price-to-free-cash-flow ratio (P/FCF) measures a company’s stock price in

relation to its cash flow from assets to stock and bondholders after capital expenditures
are paid. The competitor group average came out to be 4.78. A P/FCF ratio under 5
denotes a company is undervalued and a P/FCF ratio over 5 denotes it is overvalued. In
this case, Oneok’s P/FCF ratio fell at 16.81, which was well above the group average of
4.78. This signifies that Oneok’s stock is overvalued. However, this ratio also indicates
that the company had more than enough cash flow to meet their obligations and
support their business operations. Using the competitor group average P/FCF ratio,
Oneok’s implied stock price came out to be $16.34, which was significantly lower than
the actual stock price of $57.47.
References

Brooks, Raymond M. (2019). Financial Management: Core Concepts  (4th Edition). Pearson.

Daily Treasury Yield Curve Rates- 5YR. U.S. Department of the Treasury.
https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yield.

OGE Energy Corp. (OGE). Yahoo Finance. https://finance.yahoo.com/quote/OGE?p=OGE .

Oneok, Inc. (OKE). Yahoo Finance. https://finance.yahoo.com/quote/OKE?p=OKE .

S&P500 Annual Total Return- 5YR. Ycharts.

https://ycharts.com/indicators/sp_500_total_return_annual.

Targa Resources Corp. (TRGP). Yahoo Finance. https://finance.yahoo.com/quote/TRGP/cash-flow?

p=TRGP.

The Williams Companies Inc. (WMB). Yahoo Finance. https://finance.yahoo.com/quote/WMB/cash-

flow?p=WMB.