What it is
If you held a share only for its dividends, what would it be worth? The dividend discount model answers: next year's cash dividend divided by (the return you require minus the rate the dividend grows).
Example: dividend Rs 10 next year, you require 12%, you expect 4% growth. Value = 10 ÷ (0.12 − 0.04) = Rs 125.
The answer is extremely sensitive to the two assumptions, so Punji shows a band across several settings, and shows 'does not apply' when growth meets or exceeds the required return (the formula breaks down).
For Nepali banks, cash dividends are often small and bonus shares large, so the model understates value for bonus-heavy payers. It is a lens, not a verdict.
How it is calculated
Value = D1 ÷ (r − g), where D1 = next cash dividend per share, r = required return, g = long-run dividend growth. Only valid when r > g.
Worked on Nabil Bank Limited, FY 2082/83 Q4
With NABIL's last cash dividend of Rs 12.50 per share, a required return of 12 to 16% and growth of 0 to 5%, the model gives about Rs 78.13 to 187.50. Punji shows the band across its settings.
What good looks like
A market price inside or below the band means the dividend stream alone supports it under those assumptions. A price far above means the market is paying for growth or bonus shares the model ignores.
Watch out
- Small changes in r or g swing the value a lot; never trust one setting.
- Bonus shares are not cash dividends; the model ignores them.
- Nepali bank dividends depend on NRB approval and capital rules, so past dividends are not a promise.
- The model fails when growth is as high as the required return.
In Nepal
A Punji / textbook tool. In Nepal, cash dividends are set from distributable profit with NRB approval and are subject to the 5% dividend tax (TDS); bonus share dividends are taxed differently. The model uses the cash portion only.
Questions
Because the formula is very sensitive to the return and growth you assume. A range is more honest than a single number.
Poorly. It counts only cash dividends, so it will undervalue a bonus-heavy payer.