Value of Companies and their stock prices

[TheU2]

NOTE: Now, i don't want any anti-capitalist or anti-corp people posting their nonsense in here. You are welcome to post but keep your nonsense to a minimum.

Consider a company that does not give out any dividends to its shareholders. Instead the company plows back all its profits back into the business because it feels that it can achieve higher returns internally rather than have its shareholders invest (or spend) their dividends elsewhere. Besides the hope of capital appreciation of its shares in the market, shareholders of this company will never see any returns in the form of cash flowing from the company that they own into their pockets.

For instance, a company like Microsoft doesn't pay dividends. Instead it knows that it can reinvest its profits back into the business (sidenote: I can't wait for Xbox). Will Microsoft pay dividends when the software/computer industry matures?

We've seen a movement toward stocks in mature industries, toward the companies that have to pay dividends in order to attract attention. For example, who would be willing to buy General Motors on the basis of its long-term growth prospects? The company may be a leader in a mature industry, but growth will be more or less in line with population statistics. So they got to pay dividends in order to attract equity capital.

But, do you think there ever can be a company that will perpetually deliver greater returns on its profits if it invests in its own business rather than give the excess cash over to the shareholders (the owners.) With the growth of multinational companies and the innovation of the past 20 years as a precurser of what is to come, I believe such a company can potentially exist.

How irrational is it then for a person to invest in a company that will never shed any excess profits to its owners bank accounts. They only reason they invest in such a company is because they know that they can sell their ownership share on the market at a higher price than they actually bought the stock for.

Let the new guy chase the cash that may never be. Well, it will be when he sells to another guy who is chasing the cash that may never be. How long can this go on? Perpetually?

CK



[This message has been edited by TheU2 (edited 11-13-2001).]

 

[TheU2]

This thread is going to die a quick death. Apparently we don't have any people here from the Finance Club.

CK

 

[melon]

Well, I'll try and revive your thread here.

Honestly, the scenario you described--corporations that reinvest into their own company and pay fewer dividends--was the corporate structure before the 1980s. Basically, the companies had better control over their stockholders, and dividends were paid only when profit was assured.

However, particularly when laws on the minimum amount of time a stock must be invested before it can be sold were repealed, it lended to more of a structure where stockholders had more control. Unfortunately, I think that this has been great cause for instability and stagnation, as the market is now more subject to collapse under panics, rather than bad profit reports. All it takes is a malicious rumor, and one can smash a company. Likewise, if the stockholders have no confidence, all the good profit reports in the world mean nothing, as was shown with the market stagnation that happened in the prolonged Bush-Gore election fight in 2000.

I think stronger companies are ones that reinvest in itself. These companies are better equipped to weather market panics. The dot-coms were a prime example of poor business management, in that they were just stockholder investments. As you can see, these same dot-coms that once sold for $100 a share back in 1998-99 are now worthless. The blue-chips, however, are as strong as they are, due to corporate reinvestment.

Regardless, I'm ideologically more in line with the European Union, which stated that the United States must learn that the stock market isn't the sole indicator of a strong or weak economy. I wish I could remember what they base their idea of a "strong economy" on now!

An interesting topic, CK. Krasno!

Melon

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"He had lived through an age when men and women with energy and ruthlessness but without much ability or persistence excelled. And even though most of them had gone under, their ignorance had confused Roy, making him wonder whether the things he had striven to learn, and thought of as 'culture,' were irrelevant. Everything was supposed to be the same: commercials, Beethoven's late quartets, pop records, shopfronts, Freud, multi-coloured hair. Greatness, comparison, value, depth: gone, gone, gone. Anything could give some pleasure; he saw that. But not everything provided the sustenance of a deeper understanding." - Hanif Kureishi, Love in a Blue Time

 

[Ana]

Who are you melon???

You seem to know it A L L ! ! !