Gordon Growth Model (GGM): Ideal Valuation for Steady Dividend Stocks

Concepts

What Is the GGM? Why Is It Called "Perpetual Growth"?

GGM stands for the Gordon Growth Model, named after economist Myron Gordon. Its core assumption is simple: a company will exist forever, and its dividends will grow at a constant rate each year.

Sounds a bit idealistic? It is. But for mature, blue-chip companies with stable dividend histories -- such as telecom or utility stocks -- this assumption is actually quite reasonable.

The formula:

P = D1 / (r - g)

• P: The stock's fair price
• D1: Expected dividend per share next year
• r: Your required rate of return (also called the discount rate or hurdle rate)
• g: The perpetual dividend growth rate

The Formula in Plain Language

Suppose you buy a stock that is expected to pay a $5 dividend next year. Your required annual return is 8%, and the company's dividends grow at roughly 3% per year.

Plug into the formula: P = 5 / (0.08 - 0.03) = 5 / 0.05 = $100

So if the current stock price is below $100, the stock is considered "undervalued" and worth considering.

One critical point: r must be greater than g. If the dividend growth rate exceeds your required return, the formula breaks down (producing a negative or infinite result), meaning the model is not applicable.

How Is GGM Different from DDM?

You may have heard of DDM (Dividend Discount Model). GGM is actually a special case of DDM. DDM is the broader concept and can handle irregular dividend growth patterns (e.g., high growth for the first five years, then stable). GGM only handles the simplest scenario: dividends growing at a constant rate forever.

In short:

• DDM = General-purpose version, flexible but more complex to calculate
• GGM = Simplified version, straightforward assumptions but quick and easy to use

If you're analyzing a mature company with a stable dividend track record spanning over a decade, GGM is usually sufficient. But for growth companies or those with erratic dividends, you'll need more sophisticated DDM or DCF models.

Hands-On: Using CTSstock

CTSstock has a built-in GGM calculator on the Valuation tab, so you don't need to crunch the formula manually.

Steps:

1. Go to any stock's analysis page and click the "Valuation" tab at the top
2. Find the GGM (Gordon Growth Model) section
3. The system automatically populates the company's recent average dividend as a reference
4. You can adjust the "required return r" and "dividend growth rate g" yourself
5. Hit calculate and see the GGM-derived fair value

We recommend checking the "Dividend Policy" tab first to see whether the company's past payouts have been stable and what the approximate growth rate has been, then come back to set the g value. This makes the estimate much more meaningful.

FAQ

Q: Is GGM suitable for all stocks?

No. GGM works best for large, mature companies with stable dividends -- think telecom, financial, and utility stocks. For non-dividend-paying growth stocks (e.g., early-stage tech companies) or cyclical stocks with highly volatile payouts, GGM results will be unreliable.

Q: How should I estimate the "perpetual growth rate g"?

The most common approach is to look at the dividend growth rate over the past 5 to 10 years and take the average. Another method is to use ROE x (1 - payout ratio), known as the "sustainable growth rate." Typically, g for mature companies falls between 2% and 5%. A perpetual growth rate above 8% is usually unrealistic -- no company can grow at a high rate forever.

Q: Can I use the GGM price as a direct buy/sell signal?

Not recommended as a standalone tool. GGM is just one of many valuation approaches, and its output is highly sensitive to small changes in r and g. Use it alongside other models (e.g., P/E ratio, EV/EBITDA) for cross-validation. If multiple models point in the same direction, the conviction level is much higher.