Glossary

Dividend discount model

The dividend discount model (DDM) is an intrinsic valuation approach that estimates the value of a company's equity as the present value of all future dividends expected to be paid to shareholders, discounted at the cost of equity. It is most applicable for mature, dividend-paying companies with stable payout policies — notably financial institutions, utilities and listed holding companies. The Gordon Growth Model (constant dividend growth DDM) simplifies the calculation to V = D₁ / (ke - g), where D₁ is the next expected dividend, ke the cost of equity and g the sustainable dividend growth rate.

Example: a Swiss listed utility pays an annual dividend of CHF 3.20 per share, expected to grow at 2.5% per year indefinitely. With a cost of equity of 7.0%, the Gordon Growth Model gives an intrinsic value of CHF 3.20 × (1 + 2.5%) / (7.0% - 2.5%) = CHF 72.9 per share — compared to a market price of CHF 68.0, suggesting the stock is slightly undervalued relative to the model's assumptions.

Hectelion applies the dividend discount model for listed company benchmarking and financial institution valuation, where dividend capacity is the primary value driver.

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