In which situation would the Gordon Growth method be preferred over the Terminal Multiple method?

The Gordon Growth method, also known as the Dividend Discount Model (DDM), is best utilized in situations where a company is expected to have stable and predictable growth in dividends over an extended period. This method relies on the premise that dividends will grow at a constant rate, which fits well in scenarios where businesses experience consistent growth patterns and have established dividend policies.

In a stable growth scenario, companies typically have a reliable business model and are less impacted by market volatility. Thus, the Gordon Growth method thrives in environments where future cash flows can be projected with a high degree of certainty, making it suitable for valuing mature, steady companies.

In contrast, a cyclical business environment tends to involve fluctuations in revenues and profits due to economic cycles. This volatility can complicate the application of the Gordon Growth method, as it relies on a steady growth assumption. Therefore, in such environments, the Terminal Multiple method might be more appropriate for accounting for variations over economic cycles.

The focus on stable growth reinforces the effectiveness of using the Gordon Growth method under conditions where consistent and reliable financial performance is evident. Thus, it is especially valuable for mature companies with predictable growth rates, as compared to more uncertain environments characterized by cyclicality or haphazard growth.