Intrinsic Valuation Methods — The Dividend Discount Model (DDM)
One of the most basic and widely used tools when it comes to business valuation is the Discount Dividend Model (DDM).
This article will start a series dedicated to intrinsic valuation methods.
Intrinsic Valuation Methods
Intrinsic valuation methods, also known as absolute valuation methods, determine the value of an asset by analyzing its underlying characteristics and cash flows. Intrinsic valuation methods attempt to estimate the true value of an asset based on its intrinsic qualities rather than relying on market data. The study of these methods belongs to the field of Corporate Finance.
John Burr Williams
John Burr Williams (1899–1989) was an American economist, who was born in Massachusetts, in the US. He earned his bachelor’s degree from Harvard University in 1920, and his Ph.D. in economics in 1932 from the same university, where he would later teach economics.
In 1930, he joined the investment firm of Wellington Management Company, where he worked as an investment analyst and portfolio manager.
In 1938, he published his most notable work “The Theory of Investment Value”, which created the field of “financial economics” and was the first systematic attempt to apply financial theory to the analysis of stock valuation.
His other notable works include “The Theory of Corporate Finance” (1951), “Investment Analysis and Management” (1967), and “The Economics of Investment” (1977).
The Dividend Discount Method (DDM)
The Dividend Discount Method (DDM) was introduced by John Burr Williams in his book “The Theory of Investment Value”, and was derived from William’s belief that dividends are the most important thing a company can offer. In William’s time, this view was countered by the belief that earnings were driving corporate value.
To that, John Burr Williams wrote:
“Most people will object at once to the foregoing formula for stocks by saying that it should use the present worth of future earnings, not…