[quote author="BlackVault CM" date=1236828237][quote author="Joe33" date=1236825291][quote author="BlackVault CM" date=1236822750][quote author="Joe33" date=1236822334][quote author="Failedagent" date=1236816937]The idea that our stock market valuation is based on companies that "earn money" but never actually give anybody any money still confuses me. Sooner or later somebody has to actually get hold of the "earned money". Constantly deferring the payment to the next generation common stock holder, presumably paying more for their shares than the previous generation, still does not allow anybody to actually spend the income earned by the company.</blockquote>
I agree with Failed Agent. If a company makes a bunch of money but just pours all of it into growth....in my mind they didn't really make any money. They are selling a hope that after they pour a bunch of money into growth, that then they will make a bunch more money. And you should buy their stock based on the bunch of money they are going to make. Unfortunately it always seem to work out that before they end up making that bunch of money, something goes sideways - they over-expand, the market tanks, etc. So in reality, they never really made any money.
If they don't end up paying money out to investors, in my mind they never actually made any money. Pouring money that you make back into growth isn't making money, it is trying to set you up to make a bunch of money in the future.</blockquote>
If you guys think the stock-market is a ponzi scheme, don't invest in it. Nobody is holding a gun to your head saying you have to invest.
To put it in simple terms. I don't think I can break it down better than this, you'll have to ask someone else if you still don't get it.
You bought an orange for 1 dollar. You ate the orange and receped the benefits. This was your return for your 1 dollar investment.
I on the other hand took the orange and stuck it in the ground instead of consuming it. I watered it and grew a tree. Now I have 1,000 oranges and sold them to you and your sister and your mother and everybody else for 1 dollar each.</blockquote>
I get it. And I don't necessarily appreciate the condescending nature of the comment.
Take your example 1 step further. You sell your 1000 oranges for $1 each. Instead of putting that money in your pocket, you then take that $1000 and plant 1000 trees. You harvest 10,000 oranges and you sell them for $1 each. You now take your $10,000 and plant 10,000 trees. Then a cold winter comes, freezes your entire harvest and kills of your 10,000 trees. You never put a single dollar in your pocket. In your example, you made $11,001. In my example, you didn't make any money.
This is what we are saying. Until you put the money in your pocket, you didn't really make any money.</blockquote>
First my message wasn't meant as condescending. However, if that is how you saw it. Use the ignore button. Thats what its there for. Based on what I read, I had to make a decision on how much you got or not, so I posted accordingly. Don't be so sensitive.
Another thing to add. I don't HOPE as you guys put it that the company makes money. I do my research based on the information I have available and make my investments accordingly. I either KNOW and do, or DON'T know and don't do.
If you are the one buying something because you hope it goes up...well all I can say is thanks for the money! Keep doing what you are doing, because you're making me rich.
Nothing is forever. Know why you are investing and know what you are investing in. Don't just dump money in the 401K scheme and believe things always go up. To me, that is foolish. Research. Invest. Sell/Buy when you see fit. Nobody says there aren't risk associated with it. It is same as buying a home...you're passing the value to the next person, if the value goes down...they are the ones at loss.
I'm still confused though. Is that what you need answered? That if you buy something it won't always go up and has the chance of going down? I mean you don't have to wait for the company to hand out earnings. By selling stock at will, you are taking in their earnings. I mean, if the earnings rise the stock will go up, and YOU can decide on your own to collect the money by selling. It can't get any easier than that. When you own shares you own part of the earnings. If the earnings go down, guess what? you don't get as much, so your investment goes down. By you OWNING the shares, you have the right on the earnings...and consequently the right on their expenses as well. You own the company, or part of it. So yes, if things are going south, perhaps you should pull the investment out of it.</blockquote>
I think the initial question has to do with the lifecycle of a typical company. With the typical pattern being startup, growth, mature, and decline. Typically dividend policy is heavily influenced by the stage in which a company is operating, as each stage has specific implications for cash needs. Without going into a dissertation on dividend policy, let it suffice that there are a number of other factors that influence the optimal dividend policy.
Getting back to the original question regarding stocks that do not pay a dividend, for a growing company the marginal return on retained earnings (read: cash that could be used to pay dividends but is not) is high, so they will pay little or no dividend. To value these companies, owners (stockholders) evaluate various measures of cash flows in relation to the reinvestment made into the business. Free Cash Flow to Equity (FCFE is one). This measurement reflects the earnings available, but not necessarily paid to equity holders as a result of operations. This number can be calculated as:
FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment.
This is a pretty useful measure as the cost to maintain the business and grow are captured and removed in the Cap EX and Working Capital figures. Though, I would caution any investor to understand the driver of the number beyond this simplified presentation. For example companies could serially underinvest in Cap-Ex, therby degrading the long-term prospects, and would appear to have more attractive FCFE.
Dividends are valuable in that they provide a tangible measure to measure the worth of a stock (bird in the hand). And unlike, financial statements, dividends can't be faked. At some point, as a company moves from the growth to the mature phase of its lifecycle, the return on investment will fall. Ideally, these companies will then distribute earnings as dividends (though there are many examples of companies that continue to reinvest earnings in loser projects and destroying value). Beyond the FCFE model mentioned above, there are other valuation model that attempt to predict the future dividend payments to assign a value. Of course these methods are generally more speculative as they rely on a greater number of estimated variables.
