Stocks without dividends?

[meditate89]

The misinformation that some of these posters display in this and other threads is just appalling.

Stocks will not appreciate in value without the promise of some future or cash rewards. Capital gains are certainly a future cash reward to consider, however. Even though you may never see a dividend, it is still possible to do very well with just capital gains. A company is worth more because it has more assets, or a larger net income, etc. The fact is, the company you currently own a part of should be able to redeploy these funds in a much more efficient way than you ever could.

Some management will make terrible decisions, such as poorly considered acquisitions, or loading the CEO up with stock options. However, as long as I trust the management of the company to manage the retained earnings well, I think they can get a much higher return on equity on my money than I could by myself- hell, why would I be investing in the company in the first place if I thought otherwise?


For example someone mentioned BRK-A, which hasn't paid a dividend in over 20 years...

If you bought the stock for (7,225) in February of 1990 ( this is as far back as yahoo goes, was too lazy to look elsewhere)

And sold the stock for its current price (109,200)

You would have made a nice profit- and you can choose WHEN to take the capital gains hit. (IE if you have a good year in poker, that's not a good year to sell your shares. Now after you've harvested some tax losses, racked up some business expenses, been unemployed- that might
be a more opportune time to "cash out" your equities. Although no time is a good time to cash out your equities unless their fundamentals have changed considerably.

To be honest with you, I would much rather a company repurchase stock in many cases than pay out a dividend, because this much more tax efficient. For example, Conoco Phillips announced a $1B stock repurchase this year. I would much rather they paid out less dividends, and
repurchased more stock, because I believe their stock is trading at a fairly low price. While I can't complain about getting a few hundred bucks, I'd much rather leave it for them to work with- they're gonna be able to get me a much better return than my HSBC account in the long run.


Once you are more familiar with the concept of compound interest, you will find that you really don't want a company with a high dividend payout rate- this generally indicates that they are past their growth stages and need little money to expand their business further. While this may seem like a good thing, you really want a company that is increasing their earnings by 15-20% per year- NOT 5%. Most companies that can sustain this type of growth need to retain their earnings and throw them back into the business to hire new employees, buy more hotels, and make sure they have some spare get out of jail free cards lying around.


bav wrote - "Whether or not a company pays dividends theoretically makes no difference whatsoever. Whether the company keeps the cash in the bank, invests in capital, invests it in buying other companies, uses it to buy back its own stock shares, or returns it to the shareholders as
dividends, the value to the shareholder is identical."

This is just blatantly untrue. If a company has a ton of cash building up in the bank that they aren't planning to use for anything, they should probably consider returning it to their shareholders in the form of a stock buyback(depending how the stock is priced) or via
dividend. The value of keeping it in the bank isn't very great, but may be necessary in some cases. OTOH, investing in capital or buying other companies COULD produce a large return for shareholders.

The value of:

- Money sitting in corporation's bank

- Returning money to shareholders

- Investing in Capital / Other companies

is rarely EVER identical. It is up to management to decide what is in the best interest of the shareholders. All three of these options MIGHT be in the best interest of the shareholders, but it is impossible to determine this- it must be taken on a case by case basis. Saying that "whether a company pays dividends or not makes no difference whatsoever" is just ignorant and blatantly wrong though.

If BRK-A had been paying out a dividend each year, the stock price and intrinsic value of the company would be MUCH MUCH MUCH lower than it is today. This is because instead of paying out those dividends, Buffet keeps them under his control, and continues to grow them at a respectable rate.

There are MANY cases where it is absolutely NOT in the best interest of the shareholders to pay out a dividend.

[Thremp]

meditate,

Thats not the point. No one is debating what is better or worse. He's asking why companies who don't give dividends have value and its due to future dividends.

In theory no rational investor would ever invest in a company that doesn't give dividends... or, I guess, assume to liquidate at a set point in time.

[meditate89]

Thremp- "In theory no rational investor would EVER invest in a company that doesn't give dividends... or, I guess, assume to liquidate at a set point in time." - this statement is just BLATANTLY UNTRUE, please stop posting if you have no idea what you're talking about. You are misleading other readers with your ignorance.

A company I invested in- Berkshire Hathaway certainly has value... and I would consider myself a rational investor (somewhat). Yet I don't expect them to pay future dividends, since they haven't paid dividends for over 20 years. I also don't expect them to liquidate any time soon.
The ONLY way I expect to EVER make money in Berkshire is IF I sell the stock for a capital gain. ( hopefully I'll pass it on to my kids or something and not need to sell my stake) Yet I am happy to own the stock because I know its intrinsic value is increasing every day- I'm perfectly content without ever seeing a dividend.

Why isn't BRK-A worth $0?????? They never pay dividends!!! how can that company be worth more than $0 if teh shareholders never get any money?! omgomgomgomg!11111! short it, quick.

[Thremp]

meditate,

Cool. Where's your monies? How do you get value? Are you hoping someone else sees value and pays more for it? Do you do this with tulips?


He asked a basic theory question and got the basic theory answer.

[meditate89]

My "monies" are in stocks. I suppose I get value from dividends and capital gains (which are unrealized until I sell, but they're still very much there). I don't really care if someone else sees value or not- my preferred holding time is very long since I have a good 20-30 years until retirement. In the long run, the market is likely to price the stock fairly- and if it doesn't, at least I have found a great investment opportunity for next year and the year after and the year after- the same underpriced, overperforming security that Mr. Market is continuing to offer me at special discount prices! I don't really believe a tulip will be worth more in 10 or 20 or 30 years than it is today, therefore, I would not invest in Tulips. Is this a trick question or something? IF BRK-A is still trading at 109K in 10 years because "nobody else saw its value" while its EPS increases from 8k to 32k during this time period, leaving it with a P/E of about 3.5 or so, you can bet your soul I would move my entire net worth into the company.
(Do you see why? Hint: it's not because I expect future dividends)

[Guppies]

Meditate, yes it would be a very good investment on your part to invest in BRK if their earnings grew while their share price stayed the same. The reason this would be a good investment is because you "know" that other people generally value stocks with higher earnings more than they do lower earnings. If the share price is undervalued (i.e. is selling for less than what is common for a stock of similar earning potential/size/growth/etc...) then it is a good idea to invest in it because it is reasonable to assume that eventually other people will reassess the price they are willing to pay for the share and then it will appreciate in value.

The question is, for what reason are people going to reassess the value of this stock and decide they want to pay for it? Is it simply because stocks have always been worth money and now it is basically an irrefutable fact that this is so? Why are people investing in something that will never return them a dime aside from the almost certain guarantee that someone in the future will want to pay more for it?

It almost seems that, in the absence of the promise of real returns to investors from the company itself, the stock market is a game where people decided the rule was going to be that growth and earnings would determine share price, even though someone invested in the stock does not actually gain anything from the growth and earnings.

I'm not sure if I'm really getting the point across that I'm trying to, did that make sense?

[Evan]

[ QUOTE ]

In theory no rational investor would ever invest in a company that doesn't give dividends... or, I guess, assume to liquidate at a set point in time.

[/ QUOTE ]
I think you're confusing "doesn't" and "won't".

[gull]

Stocks don't need future dividends to have value. Duh.

Think about buying a gold bar as an investment does it pay dividends? Does it have value?

Consider a piece of artwork as an investment. Does it pay dividends? Does it have value?

What if you owned an entire company and not just a tiny piece? Does it need to pay dividends? Does it have value?

Think about investing in trading cards. Do they pay dividends? Do they have value?

All of these examples have value and possible appreciation, yet none of them pay dividends.

[meditate89]

people MIGHT reassess the value of a stock when its earnings increase, or its book value increases, or its intrinsic value increases. (These events are not mutually exclusive by any means)

think of it this way: by holding a stock, you own a small part of a business. You own their earnings, you own their debt, and you own their assets. You just can't choose to distribute the cash that the company you own holds if all of the other owners are not interested in doing so.

However, the larger percentage of the company you control, the more sway you have over the companies use of earnings, debts, etc. For example, if you were Warren Buffet (who owns a controlling stake in Berkshire Hathaway), you might have a lot of say about whether the company pays a dividend, or whether the company buys or sells an asset, etc.

In many companies, each share is entitled to a vote on many matters- so if you have enough money ( which probably not many people on this board have ) you may be able to work to facilitate change in the company.

Do not think of a stock as a lottery ticket, or a meaningless piece of paper. Think of a stock as part ownership in a business. You own a fraction of that business, no matter how small it is. As the business that you own grows more and earns more money, of course the share price is sure to follow.

Guppies you seem genuinely interested in learning, and I've tried to explain as best I could... but I'm afraid that explaining things may not be my strong suit. If you could let me know what books you've read about the stock market so far, I could perhaps recommend you a few more that might help you to understand better. One you should definitely read through 5 or 10 times if you haven't already is the Intelligent Investor by Graham.

p.s.

Thremp- using the word EVER just makes it even harder for you to attempt to defend your statements...

[Thremp]

meditate,

Lets take your example and set some basic guidelines.

1) The company won't liquidate.
2) It won't pay dividends.
3) Ergo the only end result is for the company to go bankrupt completely and totally at some point in the future or continue running forever and never pay money to shareholders.

Capital gains in this scenario are just paper gains. There is no tangible gain to investors, since the company has no plan to pass those gains onto investors. This is very basic.

Note: After looking over Evan's reply and what you wrote at the end of yours there might be some confusion. What I am trying to say is that there must be dividends at some point in the companies future or it has no value.