I was looking at my dividend yield stock screener (exchange-traded, price > $5 and yield > 10%) and I found **Great Northern Iron Ore Properties** (NYSE:GNI). This stock intrigued me, and so I delved deeper before deciding to give the stock a pass. Also, after I evaluated the stock, I realized it could still be overvalued. While another *Seeking Alpha* writer has already got a jump-start on this stock, I am sharing my analysis with you below so you know where a few of us bears base our opinions.

Great Northern Iron Ore Properties is a conventional non-voting trust that is in a unique situation. It is one of the few publicly listed stocks that has a known non-corporate action (bankruptcy, merger) termination date. On its website, you can read how the trust is due to cease trading on April 6th, 2015 and the "net monies" will be paid out to shareholders. As of December 31st, 2011, this amount was determined to be $8.59 per share. This means that this company is a great example for valuation via the capital asset pricing model (CAPM) to get a discount rate and then discounting the dividends and then terminal value (net monies/share) to find out the current value. No longer is this company assumed to be a "going concern", so future growth rates and risk premiums are not needed. Rather we can step through an example and I can show you why this stock is currently trading at a much higher value than the intrinsic asset value.

## Basics

The CAPM formula is Risk Free Rate + Beta of a Stock [ Equity Market Risk Premium]. CAPM requires you to figure out a risk free rate and an equity market risk premium. You also need to know the stock's Beta to the market. The risk free rate is generally the rate on a 10 year US Government Bond. For this example, I am using an Rf of 1.65%.

I went to a few different free locations and the best site I found was care of Aswath Damodaran, a corporate finance professor at NYU Stern. Based on the risk free rate above and the trailing market cash yield (defined on Aswath's website), the equity risk premium is 6.59%. If you look up *Yahoo Finance*, the Beta on Great Northern Iron Ore is 0.53.

The CAPM formula thus gives an Required Return for Great Northern Iron Ore of 1.65 + 0.53(6.59) = 5.1427%. This is the value we will use to discount future dividend payments and the terminal value on 4/6/2015.

Now we also need to figure out a growth rate in dividends. Here are the dividends for the past few years:

1/30/2009 | 4.5 | 2009 |

4/30/2009 | 1.8 | 2009 |

7/31/2009 | 1.8 | 2009 |

10/30/2009 | 1.8 | 2009 |

1/29/2010 | 2.6 | 2010 |

4/30/2010 | 2 | 2010 |

7/30/2010 | 2.75 | 2010 |

10/29/2010 | 3.75 | 2010 |

1/31/2011 | 3.75 | 2011 |

4/29/2011 | 2.25 | 2011 |

7/29/2011 | 3 | 2011 |

10/31/2011 | 4 | 2011 |

1/31/2012 | 5.75 | 2012 |

4/30/2012 | 2.25 | 2012 |

7/31/2012 | 3 | 2012 |

The average year-over-year growth rate in dividends is about 14%. Using that growth rate, I expanded out the dividends to April 6th and projected these dividends based on the previous ones (with some rounding):

10/31/2012 | 4 | 2012 |

1/31/2013 | 6.25 | 2013 |

4/30/2013 | 3.25 | 2013 |

7/31/2013 | 3.25 | 2013 |

10/31/2013 | 4.25 | 2013 |

1/31/2014 | 7.18 | 2014 |

4/30/2014 | 3.73 | 2014 |

7/31/2014 | 3.73 | 2014 |

10/31/2014 | 4.88 | 2014 |

1/31/2015 | 8.25 | 2015 |

4/6/2015 | 4.29 | 2015 |

This produces the total dividends by year below:

2009 | 9.90 |

2010 | 11.10 |

2011 | 13.00 |

2012 | 15.00 |

2013 | 17.23 |

2014 | 19.53 |

2015 | 12.54 |

This is where the fun part begins. I then discounted each of the dividends back to today by using the simple formula of Discount factor = (1 + Req Return GNI)^(date dividend-today)/360. So for example, the dividend paying out at the end of October has a discount factor of 0.29 for a present value of **3.94**. You repeat this process for every expected dividend and get a present value of dividends of **$48.95**.

Given the current price of the stock of $67.25, this means the implied present value of the "net monies" shares is $18.3. At this point you have to ask, but we already know the current terminal value is $8.59. If we assume that value is a proxy for the discounted terminal value, then you still have a current fair value of **$57.53**. So Great Northern Iron Ore's share price collapse this year (down 43% YTD) is justified in my mind and still has room to fall.

## Conclusions and Shortcomings

There are some pitfalls of the analysis I did above. For one, Great Northern Iron Ore may be able to increase its dividends over the next two years above my estimate. This would produce a higher terminal value and could make the stock more fairly valued. Also, the discount rate that I used on Great Northern Iron Ore may be too low or too high, in which case my estimate will be off-base. Finally, if Great Northern Iron Ore does not pay that final dividend in April of 2015 (it was assumed under my analysis that there would be a final dividend + liquidation value), the value of Great Northern Iron Ore would be different.

In closing, Great Northern Iron Ore has been a wonderful stock for shareholders over the lifetime of the trust (total dividends well above the share price). Now that the trust's termination date is coming closer, it may be time to rethink holding this security.

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