What is Dividend Discount Model?
The Dividend Discount Model (DDM) values a share as the present value of all future dividends the holder expects to receive. The simplest form assumes dividends grow at a constant rate forever, giving the Gordon growth formula: price equals next year’s dividend divided by required return minus growth rate.
How It Works
- Forecast future dividends per share.
- Choose an appropriate required return, often from CAPM.
- Discount each future dividend back to today.
- Sum the present values, or use a perpetuity formula for steady growth.
Saudi Context
Saudi banks and utilities with stable payout policies, like SEC or Saudi Telecom, are well suited to DDM valuation; high-growth tech names usually need a multi-stage variant.
Example
If next year’s dividend is SAR 4, the required return is 10 percent and growth is 4 percent, the share value is 4 / (0.10 – 0.04) = SAR 66.67.