How to Calculate Growth Implied in Stock Price

Original post by C. Taylor of Demand Media

The Gordon growth model allows you to predict the price at which a stock should be trading by analyzing the dividends, stock rate of return and the dividend growth rate. Normally, this calculation is performed to determine if a stock is undervalued or overvalued, relative to the calculated value. However, this calculation also works in reverse by using a stock's current trading price to calculate the implied growth rate of its dividends.

Step 1

Contact your investment broker to obtain the current stock price, dividends per share and expected return on the stock price.

Step 2

Divide the annual dividends per share by the current stock price. As an example, if a company offers dividends of $3 per share and the stock is currently trading at $75, then you would get 0.04.

Step 3

Subtract this figure from the stock's rate of return to calculate the implied growth rate of the dividend. In the example, if the expected rate of return is 9 percent, you would subtract 0.04 from 0.09 to get an implied growth rate of 0.05, or 5 percent.

References

• Financial Education: Implied Growth Rates

About the Author

C. Taylor has been a professional writer since 2009. He has written for online publications and the "Journal of Asian Martial Arts." Taylor specializes in martial arts, traveling, sciences and computer repair. He received a Master of Science in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences from the College of Charleston.