Stock Fair Value Calculator

Stock Fair Value Calculator (Gordon Growth Model)

Use this calculator to estimate the intrinsic fair value of a stock based on its current dividend, expected dividend growth, and your required rate of return. This model is most suitable for mature companies with a stable dividend history.

function calculateFairValue() { var currentDividend = parseFloat(document.getElementById('currentDividend').value); var dividendGrowthRate = parseFloat(document.getElementById('dividendGrowthRate').value) / 100; var requiredRateOfReturn = parseFloat(document.getElementById('requiredRateOfReturn').value) / 100; var resultDiv = document.getElementById('fairValueResult'); if (isNaN(currentDividend) || isNaN(dividendGrowthRate) || isNaN(requiredRateOfReturn) || currentDividend < 0 || dividendGrowthRate < 0 || requiredRateOfReturn < 0) { resultDiv.innerHTML = 'Please enter valid positive numbers for all fields.'; return; } if (requiredRateOfReturn <= dividendGrowthRate) { resultDiv.innerHTML = 'Error: Your Required Rate of Return must be greater than the Dividend Growth Rate for this model to be valid. This indicates either unsustainable growth or an extremely undervalued stock.'; return; } var fairValue = currentDividend * (1 + dividendGrowthRate) / (requiredRateOfReturn – dividendGrowthRate); resultDiv.innerHTML = '

Calculated Fair Value:

' + 'Based on your inputs, the estimated fair value per share is: $' + fairValue.toFixed(2) + ''; }

Understanding Stock Fair Value and the Gordon Growth Model

Determining the "fair value" of a stock is a cornerstone of fundamental analysis for investors. It's an estimate of a company's intrinsic worth, independent of its current market price. If a stock's market price is significantly below its calculated fair value, it might be considered undervalued and a potential buying opportunity. Conversely, if the market price is above its fair value, it might be overvalued.

What is the Gordon Growth Model?

The Gordon Growth Model (GGM), also known as the Dividend Discount Model (DDM) with constant growth, is a quantitative formula used to determine the intrinsic value of a stock based on a series of future dividends that grow at a constant rate. It assumes that a company's dividends will grow at a steady rate indefinitely.

The formula for the Gordon Growth Model is:

Fair Value = D1 / (r - g)

Where:

• D1 = Expected dividend per share next year (Current Dividend * (1 + Growth Rate))
• r = Required Rate of Return (or Cost of Equity)
• g = Constant Dividend Growth Rate

Inputs for the Calculator Explained:

1. Current Annual Dividend per Share ($): This is the total dividend paid out per share over the last 12 months. You can usually find this information on financial websites or the company's investor relations page.
2. Expected Annual Dividend Growth Rate (%): This is your projection for how much the company's dividend will grow each year. This is a critical input and often requires research into the company's historical dividend growth, earnings growth, and industry prospects. A common mistake is to assume an unrealistically high growth rate.
3. Required Rate of Return (%): Also known as the discount rate or cost of equity, this represents the minimum annual return an investor expects to receive from an investment, given its risk. It often reflects your personal investment goals, the risk-free rate, and the equity risk premium. For example, if you expect a 10% annual return from your stock investments, that would be your required rate of return.

How to Use the Calculator:

Simply input the current annual dividend per share, your estimated dividend growth rate, and your required rate of return into the respective fields. Click "Calculate Fair Value" to see the estimated intrinsic value of the stock according to the Gordon Growth Model.

Example Scenario:

Let's say you are analyzing a company with the following characteristics:

• Current Annual Dividend per Share: $2.50
• Expected Annual Dividend Growth Rate: 5%
• Your Required Rate of Return: 12%

Using the calculator:

• Current Annual Dividend per Share: 2.50
• Expected Annual Dividend Growth Rate: 5
• Required Rate of Return: 12

The calculation would be:

• D1 = $2.50 * (1 + 0.05) = $2.625
• Fair Value = $2.625 / (0.12 – 0.05) = $2.625 / 0.07 = $37.50

The calculator would show an estimated fair value of $37.50 per share.

Limitations of the Gordon Growth Model:

While useful, the GGM has several important limitations:

• Constant Growth Assumption: It assumes dividends grow at a constant rate indefinitely, which is rarely the case for real-world companies. Companies often experience varying growth rates over different periods.
• Sensitivity to Inputs: Small changes in the dividend growth rate or required rate of return can lead to significant changes in the calculated fair value.
• Required Rate > Growth Rate: The model breaks down if the required rate of return is less than or equal to the dividend growth rate, as it would result in a negative or infinite stock value, which is illogical.
• Not for Non-Dividend Payers: It cannot be used for companies that do not pay dividends.
• Maturity Assumption: It's best suited for mature, stable companies with a consistent dividend policy, not for high-growth startups or cyclical businesses.

Despite its limitations, the Gordon Growth Model provides a straightforward framework for valuing dividend-paying stocks and can be a valuable tool when used in conjunction with other valuation methods.