Dividend discount model (DDM) - Financial definition
Financial acronyms
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Concise definition of the term dividend discount model
The dividend discount model is a method of valuing a company's stock price based on the assumption that its stock is equal to the net present value of future dividends.
Comprehensive definition of the term dividend discount model
The DDM is derived from the formula for the present value of a perpetuity. Factors entering into the calculation are the dividend per share, the discount rate and the dividend growth rate.
If the value obtained from the DDM is higher than the current trading price of shares, then the stock is deemed undervalued and vice versa.
As its calculation is based on dividend payments, it does not work for companies that don't pay out dividends.