Input Parameters
When to Use This Model
- Mature companies with stable dividend growth
- Utility and consumer staple stocks
- Companies with long dividend payment history
- Growth rate must be less than required return (g < r)
Intrinsic Value
Step-by-Step Calculation
Sensitivity Analysis
Intrinsic value across different growth rates and required returns:
Understanding the Gordon Growth Model
What is the Gordon Growth Model?
The Gordon Growth Model (GGM), developed by Myron Gordon and Eli Shapiro in 1956, is a method for valuing a stock based on the present value of its future dividends, assuming they grow at a constant rate forever. It is a special case of the Dividend Discount Model (DDM) where dividends are expected to increase at a single, unchanging rate.
The model is widely used by fundamental analysts and value investors to estimate whether a dividend-paying stock is overvalued or undervalued relative to its intrinsic worth.
The Formula
P0 = D1 / (r - g)
- P0 = Intrinsic value (fair price) of the stock today
- D1 = Expected dividend next year = D0 x (1 + g)
- r = Required rate of return (discount rate / cost of equity)
- g = Constant annual dividend growth rate (must be less than r)
Good For
- Mature, stable dividend payers
- Utilities and consumer staples
- Blue-chip stocks with long dividend history
- Quick valuation screening
Not Ideal For
- High-growth companies (g may exceed r)
- Non-dividend paying stocks
- Cyclical industries with variable dividends
- Companies expected to change payout policy
Limitations
- Constant growth assumption: Few companies maintain truly constant dividend growth indefinitely
- Sensitivity to inputs: Small changes in g or r produce large swings in the calculated value
- Only for dividend payers: Cannot value companies that do not pay dividends
- Ignores non-dividend factors: Does not account for share buybacks, asset sales, or other value drivers
Frequently Asked Questions
The Gordon Growth Model (GGM), also known as the Gordon Dividend Discount Model, values a stock based on the present value of its future dividends assuming constant growth. The formula is P0 = D1 / (r - g), where D1 is next year's expected dividend, r is the required rate of return, and g is the constant dividend growth rate. It was developed by Myron Gordon and Eli Shapiro in 1956.
The GGM works best for mature, stable companies that pay regular dividends with predictable growth, such as utilities, consumer staples, and large-cap blue chips. It is less suitable for high-growth companies that reinvest most earnings, companies with irregular dividends, or firms in cyclical industries where growth rates fluctuate significantly.
If the growth rate (g) equals or exceeds the required rate of return (r), the formula P0 = D1 / (r - g) produces a negative or infinite value, which is economically meaningless. A perpetually growing dividend at a rate equal to or above the discount rate would imply the stock has infinite value. In practice, sustainable long-term dividend growth rarely exceeds 5-6% for most companies.
Common methods include: (1) Historical approach - calculate the compound annual growth rate (CAGR) of dividends over the past 5-10 years; (2) Fundamental approach - use the sustainable growth rate formula: g = ROE x Retention Ratio; (3) Analyst estimates - use consensus earnings growth forecasts as a proxy. Choose a rate that reflects long-term sustainability, not short-term spikes.
The implied dividend yield equals the required rate of return minus the growth rate (r - g). For example, if r = 10% and g = 5%, the implied dividend yield is 5%. This provides a useful cross-check: if the calculated yield seems unrealistically high or low compared to the stock's actual yield, your input assumptions may need adjustment.
Disclaimer
This calculator is for educational and informational purposes only. It is not financial advice. The Gordon Growth Model is one of many tools for valuing stocks and should be used alongside other valuation methods and qualitative analysis. Results are highly sensitive to input assumptions. Always verify data from official sources and consult with qualified professionals for investment decisions.
