Revista Internacional de Economia e Ciências de Gestão

The Reliability of Constant Growth Dividend Discount Model (DDM) in Valuation of Philippine Common Stocks

Abstract

Roy Bornilla Gacus and Jennifer E Hinlo

The constant growth dividend discount model (DDM) is said to be the simplest and most popular valuation method to estimate the intrinsic value of the company’s stocks. This study is aimed to test the reliability of the constant growth DDM in valuation of the selected common stock listed companies in the Philippine Stock Exchange (PSE). The accuracy of constant growth DDM to predict the value of common stocks was compared from the actual values using the symmetric median absolute percentage error (sMdAPE), and then tested whether the median difference between the predicted and actual values of the selected common stock listed companies were significant using the Wilcoxon signed-rank test. Results of the study showed that majority of the companies had a sMdAPE less than 30%. This means that the error to predict the common stock values among the companies was less than 30%. Furthermore, the predicted values of 15 common stock companies were not significantly different from the actual values (predicted values were statistically the same with the actual values). The results are jibed with the theory that using the dividends per share can predict the common stock prices using the constant growth DDM. Based on the model, investors are willing to buy, hold or sell the stock. Therefore, the constant growth DDM is a reliable model to predict the common stock prices among the 15 companies listed in the PSE.