Furthermore, dividends are approved by the board once per quarter or once per year. A dividend on a stock is not a contractual guarantee like it is on a bond. Therefore, it cannot be a basis of value.
With your logic, Berkshire Hathaway is a long-running greater-fool tulip bubble whose shares are only bidded up by finding more shmucks.
If I knew for certain (big if) that a business would never have a liquidity event and I couldn't transfer my ownership then it's dead capital for all intents and purposes and you could consider its value essentially $0, right?
Even if a company doesn't currently pay dividends, it will eventually do so or be purchased by a company that does. That's the theory at least.
“Underlying value” is a meaningless word btw
So stock marked is always meaningless except considering it is so large and consequanetial and so many people have access to it that it will be rational automagically. This is more of a belief that seems to be fairly correct than a rational line of thinking. This is similar to Democracy in a way
A gallon of oil can be $3 or $6 depending on whether someone is willing to pay. It can also be $10 but only if people are willing to buy it at $10 if not "prices will come down to match the demand" - another way of saying it would be $9..$8...$7...$6 until it matches a buyer at which point gas is $6.
Which for most investors with Class C/D shares is... the square root of zero.
They assert no control over the business, the only way to benefit from the stock is to find another shmuck to buy it at a higher price.
Use Aldi (revenue ~$120B) as an example. Do you think a person would be a shmuck to buy a slice of it now versus when revenue was $1 million? If not, why not? Your answer will help understand why stock has value even without voting control or dividends.
This is wildly incorrect. A profitable company can decide to begin paying out dividends, which can eventually return > 100% of the investor's purchase price. A company can issue more stock or bonds to raise cash to pay investors. A company can spin off assets to raise cash to pay investors.
Your framing is very much like a short-term PE investor, and if you look to their playbooks you can see there are many ways for intrinsic value to be realized while leaving an operating business behind. There are any number of stories where PE investors make big profits and then turn around and resell the company for more than they paid.
>If a stock never intends to pay dividends, the value of the stock is simply the price the next shumck is willing to pay.
So, by construction, we're talking about the value of shares in a hypothetical company that admits it will _never_ pay dividends. And we're asking what value that stock has BESIDES selling it to another shmuck, so for the purposes of the exercise, it's clearest to just imagine we are not allowed to sell to someone else. Most people will tell you that the stock nevertheless still has value because you own a share of the company itself, which entitles you to a share of its liquidation value. However, the argument I've been making here and in other posts are that:
a. A company tends to be "greater than the sum of its parts". The techno-social arrangement of people and business flows is part of what allows the company to be profitable, so disassembling it, selling off the machinery and returning whatever cash assets it had to the investors is unlikely to cover the market cap (at least, as they are priced today in current climate)
b. Even looking at whatever value IS leftover, the circumstances that lead to you realizing that value are extremely fraught / carry other baggage. It usually doesn't lead to common investors getting value back out, and cannot realistically be a justification for the current valuation of most big non-dividend stocks. For instance, consider how valuable it was to own a share of the underlying capital assets of Bed Bath and Beyond when it declared bankruptcy. It was far worse than just point 'a' ("oh no, we sold all the inventory and real estate it still didn't cover the market cap"). No, if you were a common investor, you essentially got $0 because there were lenders and preferred investors ahead of you in line that consumed those assets and left you crumbs.
c. Acquisitions are the best chance of turning your "ownership of the company itself" into dollars... but this is also slightly cheating, because you're appealing to sale of the shares to another entity again. Now, in real life, if a single entity owned the entire company, it would probably be able to extract some of the business's cash flows (a power which common investors lacked). So it's not quite fair to call the acquiring entity "the next shmuck", since they may be able to realize actual $ value in a way that the common investor couldn't. But technically, if we're playing along with the thought exercise, the premise is that the company continually reinvests in itself and refuses to pay out to the owners. If somebody buys out the company, takes it private, and redirects the profits to their own coffers, the new owning entity is essentially getting dividends by another name.
Voting rights are also not valuable by themselves - they are only useful to steer the company towards greater future payouts, which means you are appealing to some other entitlement to value.
If you zoom out, a company is a temporary arrangement of people and things that makes more money than it spends _over time_. They are not really designed to accumulate and store value in and of themselves. The machines the employees use to do the work is a small fraction of the overall utility of a living breathing business. The valuable part is the capacity of this techno-social organism to reliably and continuously make profit, which is far greater than the sum of its parts. So if the profit that’s being earned is never paid out to stakeholders, then there’s no point in being a stakeholder. If the profit is redirected to make the organism bigger, then you are trading now-dollars for future-dollars which must be appropriately discounted. If everyone expects a company to do this forever, then the correct price is what the expected liquidation share should be, and that number is basically zero.
Yet, stocks that do not pay dividends exist at high valuations. What that tells you is that modern day stock trading is tulips: the lion’s share of the value derives from a temporarily stable, shared, _correct_ perception that someone else will buy it back from you.
The reality is that general investors are the greater fools in this arrangement. The prevalence of preferred stock is a tell that there are owners and there are “owners”. What we should do is recognize this and admit that the big initial investors and employees themselves are the owners, because they are the group small enough to actually realize liquidation value (should it ever be necessary). The public investors have no realistic claim on that value, so their shares should be more clearly labeled as dividend rights, which would cause them to be priced as such.
It is a way to distribute the money to the investors, that their tax system favors.
You are correct that stock buybacks are another way that companies reward their shareholders.
Apple, Oracle, Nvidia, Cisco, Alphabet, Meta, Salesforce, and Qualcomm all pay dividends now. It's not unreasonable to expect Uber and Tesla to pay in the future. However, the median time after IPO for similar companies to pay a dividend is close to 20 years. So we could expect Uber to perhaps wfstart paying sometime around 2039. Tesla...is Tesla so who knows?
The big difference is you pay taxes of dividends - you don't pay taxes on the stock going up year over year. Unrealized gains compound much faster than realized ones.
