What Is the Gordon Growth Model?

Gordon's dividend growth model is also known as the "Dividend and Invariant Growth Model" and "Gordon Model". It is widely accepted and used in most financial and investment textbooks Stock Valuation Model. It reveals the relationship between the stock price, expected base period dividend, discount rate and fixed dividend growth rate, and is expressed by the formula: Theoretical stock price V = D ₀ (1 + g) / (rg) = D ₁ / (rg) .

Gordon dividend growth model

Gordon's dividend growth model is a widely accepted and applied stock valuation model, and it is the second special form of dividend discounting. The model assumes a sustainable inflow of future dividends.

The Discounted Dividend Model (DDM) considers the intrinsic value of a stock to be the sum of the present value of expected future dividends, expressed as a formula:

V ₀ is the present value of the stock (the theoretical stock price), D _t is the expected dividend paid at the end of year t, g is the fixed growth rate of dividends (dividend distribution), and r is the necessary return or discount rate of the stock. Since the necessary rate of return is greater than the fixed dividend growth rate, (1 + g) \ (1 + r) <1, the lower power function can be used.

If a company paid a dividend of 1.80 yuan last year, it is expected that the company's stock dividends will increase at a rate of 5% per year in the coming days. Therefore, it is expected that the dividend for the next year is equal to 1.80 × (1 + 0.05) = 1.89 (yuan). assumed

Gordon's dividend growth model model, the company's dividend policy will have an impact on the value of the stock. One of the reasons this model is useful is that it allows investors to determine the absolute or "intrinsic value" of a company that is not affected by current stock market conditions. Second, the Gordon model measures future dividends (rather than earnings) and pays attention to the actual cash flows that investors are expected to obtain, which helps companies in different industries to compare. Although the concept of this model is very simple, it is not widely used except for some institutional investors, because it is very troublesome to use without the necessary data and analysis tools.

The dividend growth model has been promoted by Professor Myron Gordon, so it is called the "Gordon model", and this model will appear in almost every investment textbook. New York University professor Aswath Damodaran wrote in his book "Investment Valuation": "In the long run, undervalued (overvalued) stocks using the Gordon model outperform (rather than) risk-adjusted market indices. An investment model is not always applicable to all stocks, but Gordon's model has still proven to be a reliable method for selecting stocks that perform well in the long run as a whole. It should be one of the effective tools that investors use to select some of their stocks in their portfolio.