Gordon growth rate

Research
1

Hi, I was studying a little of econometrics to start to use the ranking system.
Now I came across the Gordon Growth model and, for curiosity, I tried to calculate the value of a stock.

According to Damodoran:
Value of Equity= Dividends per share * (1 + Expected Growth Rate in Earnings and Dividends)/(Cost of Equity - Expected Growth Rate in Earnings and Dividends)

For this example, I take into consideration ED (Corporate Edison).
ROE = 8%
EPS = 3.8$
Dividends Pay-ratio: 0.72
Dividends per share = EPSDividends Pay-ratio = 3.80.78 = 4.8
Expected Growth Rate in Earnings and Dividends: ROE*(1-payout) = 8*0.28 = 2.24
Cost of equity:4.02
Value of Equity = 4.8 * (1 + 0.028)/ (0.042 - .028) = 412
The value I get is completely out of any logic. I suppose there is an error (DPS seems off).

The nice thing is that, even when I use his (Damodaran) excel sheet (in Attachment) to calculate the value of equity all is a real mess… and I get strange values!

Any help?

ddmst (5).xls (14 KB)

2

Using Damodaran’s spreadsheet, you should fill it out as follows:

EPS = $4.50/share
Payout ratio = 69%
Beta = 0.34
(these last three numbers I got from the stock’s snapshot page: https://www.portfolio123.com/app/stock/snapshot/ED%3AUSA)
Risk-free rate: this is usually the ten-year treasury note, which is 2.96%.
Damodaran pegs the US equity risk premium as 4.24%.
An expected growth rate of 2.24% seems reasonable for ED.
This gives a valuation for ED of $147 per share. Which means ED is somewhat underpriced at $93.
I’ve grappled with valuation quite a bit. I’d like to suggest that you read three articles I wrote to get my take on it:
https://blog.portfolio123.com/the-cost-of-equity-rethinking-the-conventional-wisdom/
https://blog.portfolio123.com/company-intrinsic-value-pt1/ and https://blog.portfolio123.com/company-intrinsic-value-pt2/ and https://blog.portfolio123.com/company-intrinsic-value-pt3/
https://blog.portfolio123.com/how-to-be-a-great-investor-part-two-understand-value/
I have a few beefs with Damodaran’s method, but he’s an absolutely brilliant thinker and I think he’s right about most things.

3

Thank you very much!
I have read with great interest your articles. In one of them you cited Simplywall. For curiosity, I gave a look at its valuation for ED: 354$!

Maybe, as you wrote, using the same valuation for all stocks is not a good idea :wink:

Thank you

Best regard