What is Gordon Growth Model?
The Gordon Growth Model is a simple version of the Dividend Discount Model that values a share based on a single constant dividend growth rate. Share value equals next year’s expected dividend divided by the required rate of return minus the constant growth rate.
How It Works
- Estimate next year’s dividend per share.
- Estimate a sustainable long-term growth rate, usually below the economy’s growth rate.
- Determine the required return on equity.
- Apply the formula P = D1 / (r – g).
Saudi Context
Equity research analysts covering mature Saudi blue chips often use the Gordon Growth Model as a sense check on multi-stage DCF valuations.
Example
For a company expected to pay SAR 5 next year, growing at 3 percent forever, with a 9 percent required return, the share is worth 5 / (0.09 – 0.03) = SAR 83.33.