@Strawman an interesting write up on the Gordon Growth Model this morning in the weekly email. Thank you! I can see how that might work. Of course it would depend on the stability of dividends and whether growth was predictable, and all models are wrong anyway!
A business that pays out all its earnings in dividends is unlikely to grow, so your return is likely to be limited to the dividend. However, due to Australian tax laws most companies in Australia pay either partly or fully franked dividends. Whereas in the US franking credits don’t apply so most of the earnings are reinvested back into the business, which is often a better use of capital.
I don’t know where Gordon comes from, but Franking credits are meaningful for most Australians. However, they are neglected in Gordon’s Growth Model. I think Gordon’s Growth Model could be tweaked for the Aussie market to account for companies paying fully franking dividends. This will definitely make a significant difference to the valuation. The reworked formula for a businesses paying a fully franked dividend might look like this:
Target price = D / 0.7(r - g) where:
it could also be tweaked for businesses paying partially franked dividends, but it’s to early in the morning for that! ;)