The Dividend Discount Model (DDM) is a widely used financial valuation tool that calculates the intrinsic value of a company's stock based on its future dividend payments. The significance of DDM lies in its focus on the fundamental value derived from a company's ability to generate and distribute dividends over time, making it especially relevant for dividend-paying companies.
However, DDM has limitations. It assumes constant or predictable dividend growth, making it less effective for companies with irregular dividend patterns or those reinvesting profits instead of distributing them. Despite this, DDM remains a cornerstone in equity valuation, emphasizing the importance of shareholder returns.
From Chapter 12:
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