Gordon Growth Model Calculator

The Gordon Growth Model prices a share as the present value of a dividend stream growing at a constant rate for ever. Next year's dividend is divided by the gap between the required return and the growth rate, so the whole valuation rests on that spread. It suits mature payers with a settled dividend record, and it breaks down as growth approaches the required return, which is where high-growth companies sit.

On the sample figures a 2 dividend growing at 5% against a 9% required return gives a next-year dividend of 2.10 and a fair value of 52.50, an implied yield of 3.81% on the current dividend. Measured against that fair value, a price of 40 sits 23.81% below it and a price of 70 sits 33.33% above it.

The spread is what makes the output move. Holding the 2 dividend and the 9% required return, lifting growth from 5% to 6% takes the value from 52.50 to 70.67, a rise of 34.60%. Holding growth at 5% and cutting the required return from 9% to 8% takes it to 70.00, a rise of 33.33%. Both moves narrow the spread from four points to three, which is why they land so close together. The model is generally treated as one input to a valuation rather than the whole of it, with discounted cash flow and multiples used alongside.

A worked example

With the defaults: current annual dividend of 2, dividend growth rate of 5%, required return of 9%. The tool returns 52.50.

What moves the number most

The required return is the strongest lever, then growth, then the dividend. In closed form the elasticities are r/(r-g) for the required return, g[1/(1+g) + 1/(r-g)] for growth, and exactly 1 for the dividend, which comes to 2.25, 1.30 and 1.00 at the sample figures. Measured discretely a 1% relative move gives -2.20%, +1.31% and +1.00%.

On each field's own step the ordering changes again, because the steps differ. Half a point on the required return takes 11.11% off, half a point on growth adds 14.83%, and a 0.05 step on the dividend adds 2.50%. The narrower the spread, the larger all three become.

The formula behind this

Fair value is next year's dividend divided by the spread between the required return and the growth rate. Next year's dividend is the current one grown once at the growth rate, so the growth figure enters twice: once lifting the dividend and once narrowing the spread. That is why growth is a stronger lever than the dividend itself.