How to Calculate Growth Implied in Stock Price

by C. Taylor

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.

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

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.

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.