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UK Mid-Caps: Nearly Dear

The FTSE 250 has had a storming run over the last five years or so, easily outstripping its big brother. Its total return over that period is about 219 per cent, compared to 127 per cent for the FTSE 100. It has also trounced both the large-cap index and indeed the small-cap index since all three came into existence in the mid-1980s, as I discuss here.

Based on one of my favourite valuation models, the FTSE 250 is indeed much dearer than the FTSE 100, as we might expect. The ShareMaestro programme – which takes into account forecast dividend growth, inflation, and riskiness – put the mid-cap index’s fundamental valuation at 16714.6 as of 27 March, only slightly above its actual price of 16202 on that date.

The full results and assumptions used to get there are shown in the table below. My thanks to ShareMaestro creator Glenn Martin for sending this through.

Date27 March 2014Current Net Dividend400.2
Share Name or IDFTSE 250Actual Dividend Growth % p.a.6.0
FTSE 250 Price16202End-Period Dividend536.3
Current FTSE250 Net Dividend Yield %2.47End-Period FTSE 250 Dividend Yield3.03
Unadjusted End-Period FTSE 250 End-Period FTSE 250 Price17721.6
Net Dividend Yield %3.25Average Dividend Yield2.75
Current FTSE100 Dividend Yield %3.65End-period Investment Value 20294.1
Average-Period Inflation Rate2.94Discounted Investment Value 18553
End-Period Inflation Rate3.21Projected growth for period % 25.3
Real Dividend Growth Rate3.00Projected annual growth % 4.6
  Personal Investment Value 
Risk Premium %11End-period Investment Value 20294.1
Redemption Yld % pa 5-yr Gilts1.81Projected growth for period % 25.3
Personal Capital Gains Tax Rate %0Projected annual growth % 4.6
Personal Extra HR Tax on Divs %0FTSE 250 Intrinsic Value16714.6
Personal Risk Premium %0Value as % of Current Price103.2

For the FTSE 100, ShareMaestro’s valuations have provided an excellent guide to subsequent returns over time. A strategy of buying the index whenever its intrinsic value has been at least 105 per cent of its current price and shifting into cash whenever value has gone below 95 per cent of the price would have produced a market-beating performance over the last few decades.

The result for the FTSE 250 backs up my view that the index is still just about worth staying long of for the moment. It is somewhat dear overall, but not yet dangerously so.