Strengths and Weaknesses of the Gordon Growth Model

The Gordon growth model is a type of dividend discount model used to value companies expected to grow at a constant rate forever. Most valuation models forecast growth for a certain time period before reverting to a Gordon growth model to estimate the ending value.

Strengths:

  • Especially useful for valuing stable-growth dividend paying companies
  • Useful for valuing broad-based equity indices
  • Simplicity and clarity
  • Helpful in understanding relationships between value, growth, required return and payout ratio
  • Useful for estimating expected rate of return

Weaknesses:

  • Output highly sensitive to assumptions for growth rate and required return
  • Not practical for valuing non-dividend paying companies
  • Not practical for valuing dividend paying stocks with unstable growth characteristics
For more information, see all articles on: Investing in Stocks, Valuation

See also:
  • The Gordon Growth Model
  • Strengths and Weaknesses of Multi-Stage Dividend Discount Models
  • Strengths and Weaknesses of the Residual Income Model
  • Multi-Stage Dividend Discount Models
  • The H-Model Dividend Discount Model
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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