Gordon Growth Model

Gordon Growth Model

A simple model to estimate the value of a stock. The model assumes one knows the dividend per share in the stock one year hence and, more importantly, that the dividends will grow at a constant rate indefinitely. Because of the latter assumption, the model is useful primarily for blue chip companies and other mature companies where dividend growth is unlikely to change. It is calculated thusly:

Stock Value = Dividend per share in one year / (Required rate of return - dividend growth rate)
References in periodicals archive ?
Meanwhile, for equity markets, we follow the Gordon growth model. In either case, the price of the assets is driven by the present discounted value of the expected future stream of earnings.
"We value UAE banks using a Gordon Growth model. At a median of 1.9x P/B and 10.0x P/E, on our estimates, we believe that UAE banks still offer value and highlight the strong RoAE outlook (2016E: 20 per cent median) and dividend yield (2015E: 5.1 per cent median).
Two recognized shortcomings of the Gordon Growth model are that payouts are seldom increasing in each period for most firms paying dividends and that payouts cannot continue to increase at a greater pace than the expansion in the economy where the organization does business.
While we do not yet cover Rostelecom, if we apply a simplified approach to valuing the company's prefs, using a Gordon Growth model, and assume a 12% discount rate and conservatively a zero growth rate for the shares' dividends, we obtain an implied value of $1.2, some 56% lower than the current $2.8.
"Our estimated value for this banking scrip is worked out to be KD1.04 ($3.61) based on adaptation of the Gordon Growth Model," Global said.
"Our estimated value for this banking scrip is worked out to be KD1.04 based on adaptation of the Gordon Growth Model," Global said.
Our estimated value for this banking scrip is worked out to be AED101.52 based on DDM (80%) and adaptation of the Gordon Growth Model (20%).
It was Gordon (1962), though, who popularized the model in subsequent articles and a book, thus giving it the title of the Gordon growth model. While the Gordon growth model is a simple approach to valuing equity, its use is limited to firms that are growing at stable rates that can be sustained forever.
This is the formula for a constant growth dividend discount model (also known as the Gordon Growth Model), where [D.sub.1] is next year's expected dividend, r is the investor's required rate of return, and g is the rate at which dividends are expected to grow.
Many articles extend the simplest Gordon growth model to allow dividend growth rates to have several stages--for instance, permitting growth firms to start with high dividend growth rates and then decelerate to a stable long-run rate.
One conclusion that can be drawn is that the market-derived capitalization rates include an income growth factor, as in the Gordon Growth Model:
Our valuations are based on a Gordon growth model (GGM), with a median CoE of 11 per cent, RoAE of 20 per cent and a terminal growth rate of three per cent.