The Dividend Discount Model (DDM) values a stock as the present value of all future dividend payments. Unlike DCF models that discount free cash flow to the firm, DDM focuses exclusively on cash returned to shareholders as dividends — making it particularly relevant for mature, dividend-paying companies.
This implementation uses a two-stage approach: Stage 1 projects dividends per share for 5 years using a near-term growth rate derived from historical dividend CAGR and analyst EPS growth estimates (blended when both are available). Stage 2 applies the Gordon Growth Model for terminal value, using a perpetuity growth rate based on the company's archetype.
A key distinction: DDM uses Cost of Equity (Ke) as the discount rate rather than WACC, because dividends are equity cash flows — they belong to shareholders after all debt obligations are met. The model is not applicable to companies that do not pay dividends or have unsustainable payout patterns.