Dividend Discount Model (DDM)
- If James Brown is the “Godfather of Soul”, then the dividend discount model could be considered the “Godfather of Equity Valuation”. Many of the approaches used today can trace their roots to DDM.
- The basic thesis of the DDM is that the value of a common stock to an investor is the present value of expected future dividend payments.
- DDM Single Holding Period
V0 = (Div1 + P1) /(1 + rce)
- V0 = present value
- Div1 = dividend expected over the next year
- P1 = share price expected when stock is sold in one year
- Note: for simplicity sake, this assumes the single holding period is equal to one year.
If the analyst believes that his/her inputs into the single period DDM are accurate, then he/she will compare the calculated value to the market price in order to determine the investment recommendation.
- DDM Multiple Holding Periods
V0 = (Div1 / (1 + rce)) + (Div2 / (1 + rce)2) + ... + (Divn + Pn) /(1 + rce)n
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- Equity Analysis Part 2 - Introduction
- Porter’s Five Competitive Forces
- Industry Analysis
- Supply and Demand Analysis
- Financial Projections in Emerging Markets
- Cost of Capital in Emerging Markets
- Cash Flows: Dividends vs. Free Cash Flows vs. Residual Income
- Dividend Discount Model (DDM)
- Gordon Growth Model (GGM)
- Present Value of Growth Opportunities (PVGO)
- GGM, Leading P/E Ratio, and Trailing P/E Ratio
- Multi-Stage Dividend Discount Models
- H-Model for Valuing Growth
- Sustainable Growth Rate