While it would be nice to have a magic crystal ball that could foretell how a stock will perform, in reality, the future expected price of a stock is influenced mostly by the cash-flows resulting from dividend payments, according to the Gordon constant growth model. In effect, the dividend payment and its expected annual growth rate will determine the growth rate of the stock itself. Once armed with this growth rate, the compound interest formula will tell you the future expected stock price for any year you enter.
In order to calculate your future expected stock price, you will need several pieces of critical information, including the stock's current price, its dividend payout and the expected growth rate of the dividend itself.
First Things First
Contact your investment broker, or go online, and find out the current stock price, dividend payout and expected dividend growth rate of the stock. Armed with this knowledge, you are then able to plug this information into a calculation to determine what the future expected stock price will be. While nothing is 100 percent certain when it comes to investing, your calculations should give you a good enough idea of where a stock's price is heading, so you can make a sound investment decision.
It is also worth noting, that the price of some stocks simply cannot be valued with a calculation. Some new companies with wild, rapid growth can surpass estimations by more than 1,000 percent, while others that were expected to do well, fall by the wayside shortly after its IPO.
Exploring The Calculation
In order to determine the future expected price of a stock, you start off by dividing the annual dividend payment by the current stock price. For example, if a stock is currently priced at $80 and offers a $3 annual dividend, you would then divide $3 by $80 to get 0.0375. Add the expected dividend growth rate to get the stock's expected growth rate. In the example from the previous step, if the expected dividend growth rate was 5 percent, then your stock would have an expected growth rate of 0.0875. Add 1 to the expected growth rate of 0.0875 to get 1.0875.
Identifying Next Steps
Raise this figure to the N power, where N is the number of years in the future for which you want to calculate the stock price. In the example, if you wanted to know the stock price two years from now, you would square 1.0875 to get 1.1827. Multiply this by the current stock price to calculate its future expected price for that year. In the example, 1.1827 times $80 gives you an expected stock price of $94.62 in two years.
- Money-Zine: Calculating Stock Prices
- The Motley Fool: How to Calculate Future Expected Stock Price
- Investopedia: Gordon Growth Model (GGM)
- Myron J. Gordon. "The Investment, Financing, and Valuation of the Corporation." R.D. Irwin, 1962.
- Walmart. "Dividend History." Accessed August 3, 2020.
C. Taylor embarked on a professional writing career in 2009 and frequently writes about technology, science, business, finance, martial arts and the great outdoors. He writes for both online and offline publications, including the Journal of Asian Martial Arts, Samsung, Radio Shack, Motley Fool, Chron, Synonym and more. He received a Master of Science degree in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences at College of Charleston. He also holds minors in statistics, physics and visual arts.