# Gordon growth model (GGM) definition and formula

By Mark Holland / 6 days ago ## What is Gordon’s Growth Model (GGM)?

The Gordon Growth Model (GGM) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It is a popular and simple variant of the Dividend Discount Model (DDM). The GGM assumes that dividends grow at a constant rate in perpetuity and calculates the present value of the infinite series of future dividends.

Because the model assumes a constant growth rate, it is generally only used for companies with stable growth rates in dividends per share.

### Key takeaways

• Gordon Growth Model (GGM) assumes that a company exists forever and that there is constant growth in dividends when valuing a company’s stock.
• GGM takes the infinite series of dividends per share and discounts them to the present using the required rate of return.
• GGM is a variant of the dividend discount model (DDM).
• GGM is ideal for companies with constant growth rates given its assumption of constant dividend growth.

## Understanding Gordon’s Growth Model

Gordon’s growth model values ​​the shares of a company by assuming steady growth in the payments a company makes to its shareholders in common capital. The three key inputs in the model are dividends per share (DPS), the growth rate in dividends per share, and the required rate of return (RoR).

The GGM attempts to calculate the fair value of a share regardless of prevailing market conditions and takes into consideration dividend payment factors and expected market returns. If the value obtained from the model is higher than the current trading price of the stock, then the stock is considered undervalued and qualifies for a purchase, and vice versa.

Dividends per share represent the annual payments that a company makes to its common capital stockholders, while the growth rate of dividends per share is how much the dividend per share rate increases from year to year. The required rate of return is a minimum rate of return that investors are willing to accept when buying shares in a company, and there are several models that investors use to estimate this rate.

GGM assumes that a company exists forever and pays dividends per share that increase at a constant rate. To estimate the value of a share, the model takes the infinite series of dividends per share and discounts them to the present using the required rate of return.

The formula is based on the mathematical properties of an infinite series of numbers that grow at a constant rate.