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well, if there are no longer any growth prospects; then i probably don't want to own it. but ill give it more thought. in reality, we are probably looking at utilities not businesses like walmart. i think walmart still has an obligation to keep opening stores.
I agree, but once you are approaching market saturation you need to be smarter about where you are opening. I would never argue is finished growing, but it's days of opening 500 stores a year are over. It has more cash than it needs to strategically open stores. At that point it can hold the cash or return it to shareholders. One way would be to buyback shares and thus increasing each remaining share's ownership of the company or giving some of the profits back to the owners (dividends). Some people don't ever want to own a fully mature company, others do.
I see it as an entrepreneur that launches companies makes them successful and then sells them (growth) vs. someone actually wanting to make a living by owning 1 company (value). You need both or the growth guy will never have a market to sell his company.
a fully mature company that can't find anything better to do with its cash can return it to investors .
but if growth is your goal unless that company still meets your goals perhaps that company outlived its usefullness as a growth vehicle.
many like myself are no longer interested in maximizing growth now that we are going from our accumulation stage to decumulation in retirement.
the stability ,lower volatility and ability to keep me ahead of inflation is what is important.
my portfolio is about 90% large cap right now in various funds . some holdings pay dividends ,some don't. i don't really care if i get a dividend or not, in fact tax wise i wish i didn't but as long as they meet my goals however they do it is fine.
but like i said if they can't compound all my money as the growth engine they once were and they need to return some to me than if i was a growth investor i would likely pass on them or make them only a small part of my portfolio..
On this we completely agree. I am not saying owning mature companies is the way to go. I'm not taking a stance at all, I'm just saying that the point of a company is to make profits for its owners, whether that is today or 20 years from now.
I think you are in over your head here. im not exactly sure who you have been talking to but companies that don't pay dividends do have value. you are just not going to be able to use a formula that requires a dividend in order to calculate it.
The person I've been talking to has a PhD in business. He seems to believe future cash flows are ultimately how to value any investment, and for companies, that's typically dividends. I didn't even think of the buyout, but that would be a valid way, too-think of it as a GREAT BIG, one-time dividend, though, and the statement stands. Notice I did say if it would NEVER pay a dividend, it would never have value.
Lots of times people buy growth companies not because of the current dividend, but they think it will eventually grow so big it can no longer efficiently use the profits (which ultimately belong to the stockholders) to grow itself.
Companies that don't pay dividends NOW only have value if
a) you anticipate getting a stream those future cash flows back someday
b) someone else will buy the stock from you, hopefully at your purchase price plus a required rate of return (and that would include the private equity buyout, which was a great point). The purchasers are not doing it because they're great guys. They think they can either sell it on or eventually get dividend income-in other words get the future cash flows.
Stock itself doesn't have *intrinsic* value. It has value because you own a piece of a profit-generating company, and, someday, after it has efficiently grown as large as it can using the profits generated through the business, will return that value to the holder of the stock. Dividends are the most obvious way.
the point of the company is to make profits for its shareholders ,whether by price appreciation alone or through appreciation and dividends.
Yes, but appreciation is only efficient for so long or else all companies should never grow below their initial rates. So UA should grow at 20-25% forever. If that's the case sign me up.
this is totally false. dividends are a byproduct of the appreciation of a stock. it is like i said above the company is liquidating a piece of the share price and giving it to you.
with or without that payment the value of the stock is the same. a 10.00 buck share prce that becomes 9.50 at the start of the new quarter and a .50 cent dividend is still 10 bucks whether they distribute that .50 cents or not.
You're quite wrong. I gave you an extreme example, and I say it again: if owning a company will NEVER give anyone a future cash flow (dividend or a one-time payment for selling the stock), its value is essentially 0. Nobody would ever buy that stock if they didn't anticipate eventually getting a future cash flow, including private equity investors.
I love watching businesses I own stock in grow, but not in the same sense as looking at a painting-I love it because I know I'll make money off it.
I think you are in over your head here. im not exactly sure who you have been talking to but companies that don't pay dividends do have value. you are just not going to be able to use a formula that requires a dividend in order to calculate it.
I found something better for you to read that's not Investopedia.
Perhaps you should read an actual professor's opinion, one who teaches corporate finance, including valuation. I didn't actually take my undergraduate finance and graduate finance classes from this guy, just from professors with very similar opinions to his.
You'll find that opinion is quite different than yours, as is mine. That doesn't put me in "over my head", it puts us in different camps. You don't have to agree, and you obviously don't; but try not to ad hominem someone with a reasonable opinion that differs from yours.
"A philosophical basis for valuation
It was Oscar Wilde who described a cynic as one who “knows the price of everything, but the value of nothing”. He could very well have been describing some equity research analysts and many investors, a surprising number of whom subscribe to the 'bigger fool' theory of investing, which argues that the value of an asset is irrelevant as long as there is a 'bigger fool' willing to buy the asset from them. While this may provide a basis for some profits, it is a dangerous game to play, since there is no guarantee that such an investor will still be around when the time to sell comes.
A postulate of sound investing is that an investor does not pay more for an assetthan its worth. This statement may seem logical and obvious, but it is forgotten and rediscovered at some time in every generation and in every market. There are those who are disingenuous enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other investors willing to pay that price. That is patently absurd. Perceptions may be all that matter when the asset is a painting or a sculpture, but investors do not (and should not) buy most assets for aesthetic or emotional reasons; financial assets are acquired for the cashflows expected on them.
Consequently, perceptions of value have to be backed up by reality, which implies that the price paid for any asset should reflect the cashflows that it is expected to generate. The models of valuation described in this book attempt to relate value to the level and expected growth in these cashflows.
There are many areas in valuation where there is room for disagreement, including how to estimate true value and how long it will take for prices to adjust to true value. But there is one point on which there can be no disagreement. Asset prices cannot be justified by merely using the argument that there will be other investors around willing to pay a higher price in the future."
Last edited by GeorgiaTransplant; 01-10-2015 at 04:09 PM..
Reason: Formatted quote to make it more readable
I am not sure what you are saying, every investor that buys a stock expects to either have drips and drabs of their appreciation in the stock returned to them as a dividend if they want cash or as appreciation when sold at some point by someone.
What determines that appreciation? Fear,greed and perception. Dividends without appreciation by markets would have a stocks value falling farther and farther down with each payment.
I am not sure what you are saying, every investor that buys a stock expects to either have drips and drabs of their appreciation in the stock returned to them as a dividend if they want cash or as appreciation when sold at some point by someone.
What determines that appreciation? Fear,greed and perception. Dividends without appreciation by markets would have a stocks value falling farther and farther down with each payment.
I'm saying if there were never dividends, or potentially a buyout, EVER expected-a stock would be worthless. In some cases, dividend stocks are explicitly bought because of the steady stream of income.
You appear to be in the camp that generally only looks for appreciation; if nobody ever thought that appreciating stock would EVER return dividends, nobody would ever buy it.
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