How we value Utilities stocks
Model: 3-Stage DDM
The Dividend Discount Model values a stock based on its future dividend payments, discounted to present value. The 3-stage variant captures three phases of a company's life: high growth (years 1-3), a transition period where growth declines linearly (years 4-6), and a terminal stage of stable, perpetual growth (year 7+).
Why this model
Regulated utilities have capped growth but high, stable dividend payouts. DDM is the canonical valuation method when dividends are the primary return to shareholders. Many utilities follow stated or regulated payout policies, so actual dividends are a direct input.
How it is calculated
Uses the median cash dividend of the last 3 years from corporate events; a company with no dividend record gets 50% of its median EPS. 3 stages: high growth (3yr at estimated rate), transition (3yr linear decay), terminal (perpetual at the sector's long-run growth rate). Discounts at cost of equity (CAPM). A payout above 40% of earnings is needed for high model reliability.
Best suited to
Regulated utilities, power companies, and water suppliers with stable, predictable dividend policies.