Apple Dividend Discount Model

For informational and educational purposes only • Not investment advice.

Apple

iPhone, services, devices

Estimated Fair Value

$22.39

Stock price: $333.69

Fair value below stock price

The Gordon Growth Dividend Discount Model estimates fair value based on expected dividends, their long-term growth and the required return on equity.

Fair Value by Dividend Growth Scenario

The chart shows how the Gordon Growth DDM estimate changes under each perpetual dividend-growth scenario. The selected scenario is highlighted, while the dashed line shows the current stock price.

Key Valuation Metrics

Dividend Growth

Equity Risk Premium

Range: 2–10%

Notes & Assumptions

• The dividend yield is very low, so the Dividend Discount Model may not be very useful for this company.

Dividend Discount Model Formulas

Dividend Discount Model

\text{Fair Value per Share} = \frac{Div_{1}}{(1+r_e)^1} + \frac{Div_{2}}{(1+r_e)^2} + \frac{Div_{3}}{(1+r_e)^3} +\cdots+ \frac{ \frac{Div_{n+1}}{r_e-g} }{ (1+r_e)^n }

Next Dividend

Div_1 = Div_0 \times (1+g)

Gordon Growth Model

\text{Fair Value per Share} = \frac{Div_{1}} {r_e-g}

What is the Dividend Discount Model?

The Dividend Discount Model (DDM) is based on the idea that dividends represent cash returned directly to shareholders and therefore contribute to the value of a stock.

The model estimates a company's intrinsic value from the dividends shareholders are expected to receive, their expected long-term growth and the return required by shareholders.

The Gordon Growth version of the DDM assumes that dividends grow at a constant long-term rate. It is therefore most suitable for companies with stable and sustainable dividend payments.

How does the Dividend Discount Model work?

The Dividend Discount Model estimates intrinsic value by starting with the current dividend, growing it into next year's expected dividend, discounting future dividends using shareholders' required return, and comparing the resulting value with the current market price.

Determine Current Dividend

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Estimate Dividend Growth

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Forecast Next Dividend

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Estimate Cost of Equity

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Apply Gordon Growth Model

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Compare With Market Price

Key Model Assumptions

• The company pays regular and sustainable cash dividends.
• Dividends are assumed to grow at a constant long-term rate.
• Sustainable Dividend Growth is estimated from Return on Equity and the Retention Ratio. EPS uses trailing twelve-month (TTM) data when available, with the latest annual value used as a fallback.
• The selected Dividend Growth scenario adjusts the Sustainable Growth Rate.
• The Cost of Equity represents the return required by shareholders and is estimated using CAPM.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• Dividend Growth must remain below the Cost of Equity for the Gordon Growth Model to produce a valid valuation.

Step 1 — Determine the Current Dividend

Current Dividend = Annual Dividend Per Share

Current Dividend:
$1.06 per share

Dividend Yield:
$1.06 / $333.69 = 0.3%

The model begins with Apple's current annual Dividend per Share, which forms the starting point for estimating future dividends.

Under the current assumptions, the annual Dividend per Share is $1.06, corresponding to a Dividend Yield of 0.3%.

Step 2 — Estimate Sustainable Dividend Growth

Return on Equity = EPS / Book Value Per Share

TTM EPS = $8.71
$8.71 / $7.32 = 119.0%

Retention Ratio = 1 − Dividend Payout Ratio

Retention Ratio = 87.8%

Sustainable Growth = Return on Equity × Retention Ratio

119.0% × 87.8% = 104.5%

Selected Dividend Growth = Sustainable Base Growth + Scenario Adjustment

Sustainable Base Growth = 5.5%
Selected Dividend Growth = 5.5%

Sustainable Dividend Growth is estimated from the company's Return on Equity and Retention Ratio. The Retention Ratio represents the portion of earnings retained rather than distributed as dividends.

The model uses trailing twelve-month (TTM) EPS when estimating Return on Equity and the Dividend Payout Ratio. Book Value Per Share is based on the latest available balance sheet value.

The resulting Sustainable Growth Rate forms the Base assumption. The selected Dividend Growth scenario then adjusts this rate to determine the growth assumption used in the valuation.

Under the current assumptions, the model uses a Dividend Growth Rate of 5.5%.

Step 3 — Estimate Next Year's Dividend

Next Dividend = Current Dividend × (1 + Dividend Growth)

$1.06 × (1 + 5.5%) = $1.12

The current Dividend per Share is increased by the selected Dividend Growth Rate to estimate a Next Dividend of $1.12 per share.

Step 4 — Calculate the Cost of Equity

Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium

4.7% + 1.17 × 5.0% = 10.5%

The Cost of Equity represents the return shareholders require for investing in Apple and is estimated using CAPM. Under the current assumptions, the Cost of Equity is 10.5%.

Step 5 — Apply the Gordon Growth Formula

Required Return Spread = Cost of Equity − Dividend Growth

Required Return Spread = 10.5% − 5.5% = 5.0%

Fair Value per Share = Next Dividend / Required Return Spread

$1.12 / 5.0% = $22.39

The Gordon Growth Model assumes that dividends continue growing at the selected Dividend Growth Rate indefinitely.

Fair Value per Share is calculated from the Next Dividend and the Required Return Spread. For Apple, this results in an estimated Fair Value per Share of $22.39.

Because the Required Return Spread appears in the denominator, relatively small changes in the Cost of Equity or Dividend Growth Rate can have a significant effect on the valuation.

Gordon Growth Dividend Discount Model (DDM)