What does the Dividend Discount Model primarily calculate?

The Dividend Discount Model (DDM) primarily calculates the intrinsic value of a company’s stock based on the present value of its expected future dividends. This model operates on the principle that the value of a stock is determined by the cash flows an investor can expect to receive from it in the form of dividends, adjusted for the time value of money.

The DDM assumes that dividends will be paid regularly and grow at a constant rate. By discounting these future dividends back to their present value using a required rate of return, the model provides a valuation that reflects the long-term financial benefits of holding the stock. Therefore, when analysts utilize the DDM, they focus on the expected growth of dividends and their timing, making it a useful tool for estimating the intrinsic value of equity investments.

The focus of the model is distinctly on future dividends rather than other financial metrics, which is why it is specifically designed to quantify the intrinsic value deriving from expected cash flows.