Definition
The Gordon Growth Model (GGM) is the simplest Dividend Discount Model. It calculates a stock's intrinsic value from one assumption: that dividends grow at a single constant rate forever.
Formula
Intrinsic Value = D₁ ÷ (Ke − g)
D₁ = Next year's expected dividend per share = D₀ × (1 + g)
Ke = Cost of equity (the return shareholders require)
g = Perpetual dividend growth rate
Rearranged to solve for implied growth
g = Ke − (D₁ ÷ Price)
This tells you what perpetual growth rate the market is currently pricing in.
When to use GGM
- Mature companies with a stable, growing dividend history
- Utilities, telecoms, banks with predictable payout policies
- Quick sanity checks — what growth rate is the market pricing in?
When not to use GGM
- Companies that don't pay dividends (FCF-based DCF is better)
- High-growth companies where g approaches or exceeds Ke (formula explodes)
- Cyclical businesses where dividends fluctuate significantly
Worked example
Worked example: Telstra (TLS.AX)
Dividend per share (D₀)$0.18
Cost of equity (Ke)9.2%
Assumed growth rate (g)3.0%
D₁ = $0.18 × 1.03$0.1854
Intrinsic Value = $0.1854 ÷ (0.092 − 0.03)$2.99
If Telstra trades at $4.10, the GGM implies the market expects faster growth than 3%. Rearranging: g = 0.092 − (0.1854 / 4.10) = 4.68% — the market is pricing in 4.68% perpetual dividend growth.