[jcampbell1]

It doesn't matter what the dividends are today. A rational stock valuation is the NPV of all future dividends. There must be a guarantee that dividends will be paid equally, otherwise there would be no rational way to price the class C stock.

In short, the class C stock must have identical dividends to the other classes.

[sopooneo]

I have been looking for this answer since I first heard about the idea of stock as a kid. No one else could ever provide it. Thank you.

"A rational stock valuation is the NPV of all future dividends"

[dpark]

Don't get too wrapped up in that answer. It assumes that investors are rational and able to see the future, when they are neither. Stock value is based on the same thing as everything else: what someone else will pay. Stock prices are no more rational than home prices.

[jcampbell1]

False. There is plenty of dispute about the NPV of all future dividends and the discount rate, but the notion is a fundamental truth. It is follows from basic math and is provable.

[dereg]

You would have done well at Lehman Brothers, really really well.

[joshu]

indeed. pretty much all the points arguing with you are actually just discussing ways to value npv.

[dpark]

Okay, but that's not what he's claiming. He's claiming that NPV is derived exclusively (and rationally, and perhaps clairvoyantly) from the future sum of dividends.

[joshu]

The value of the stock is the current estimation of that npv. How it is estimated is irrelevant. It is the group estimation across all buyers and sellers.

[dpark]

It's provable? Please enlighten me.

[jcampbell1]

You are welcome. When you buy a stock, you are buying two things: rights to the profits (via dividends), and rights to manage the company (stock voting). Most people you encounter don't undersand stocks at all, and I'll likely be downvoted to hell, but those fools are wrong. Don't listen.

Valuation is a super complicated subject, but what stock represents is a simple fact.

[dereg]

You're wrong. You're oversimplifying stock valuation to a hazard. You cannot use the dividend discount model to value stocks that pay no dividends. This is a fact. Furthermore, a dividend is not the only source of return from a stock, there's also capital appreciation. A stock appreciates for various reasons including investor sentiment and share repurchases (another way for a company to distribute profits). Also, you don't necessarily receive a voting right for a common share.

Like you said, valuation is a super complicated subject so don't mislead others with an incorrect simplification of it.

[prodigal_erik]

Of course you can, you just may not enjoy the answer. Without dividends, there's no actual mechanism for corporate success to benefit shareholders, there's only how "investors" assume each other will probably react to the news. Even share buybacks are priced through this hall of mirrors. A rational valuation is not an attempt to predict where the speculators' random walk will be at some point (there's every sign that can't be done) but the amount you can pay in confidence of ending up with a profit regardless of all that, based solely on how the company plans to reward buy-and-hold investors. These days the answer is often "only speculators think these shares should have any value", and Mark Cuban astutely likened those stocks to baseball cards.

[dereg]

Market expectations do price shares. These expectations can be assumptions about growth, dividend payouts, and such. You're claiming that there is no random walk component, which there clearly is. There is no such thing as paying an amount "in confidence of ending up with a profit" in the world of equities investment — that's an absurd statement and not a means for rational valuation. You can mitigate your portfolio risk but you will never eliminate systematic risk.

[sopooneo]

But why would capital appreciation matter if the stock holder never gets to take that capitol? Aside from voting rights, if you assume a stock will never pay dividends, I don't understand how it would have any value at all.

[dereg]

That's a really good question. First, to clarify, capital appreciation refers to the increase of the price of a stock. Investors buy stocks for a different reasons. The primary reason is to receive a return on that investment. Return is an all-encompassing word. Investors earn a return if the stock price goes up or if the company pays dividends.

There are many companies that don't distribute dividends, either because (1) they may be in poor financial health or because (2) they prefer to reinvest that money in assets that will help generate more return. Even without the dividends, people do buy these companies. In the second case, a company's earnings are expected to rapidly increase, thereby generating more value and lifting the price of the stock. (These are called growth stocks.)

Analysts have developed a gazillion ways to determine a stock's value and potential return. Like many other things, the value of stock is in the eye of the beholder. You could be willing to purchase a share of Google for $2, while I may only be willing to spend $1 for a share. A market for Google develops when millions of people apply their own valuations of Google into buying and selling that stock. It's the market mechanism gives the a stock value (price).

It's likely that this answer won't satisfy you, because I'm essentially telling you that a market capitalization is in the eye of the beholder. Questioning a stock's value is an existential question that applies to everything that we buy, hold, or sell.

It's likely that this answer won't satisfy you, but it shouldn't. Nobody should ever feel that they "know" the value of a stock, that's preposterous.

[sopooneo]

I don't think this is right. I don't think it's just in the eye of the beholder, and it is not turtles all the way down. It may be 5,000 layers deep, with people believing what people will believe what people will believe what people will believe. But at it's base, at the bottom, is at least the idea of people who want stocks because you get payed dividends for having them, or might hope to get payed in the future.

Imagine I was a business owner and I made up a new thing called "bleg". The way this works is that I need a new roof for my factory, but I'd rather not borrow the money for it from a bank. Instead I tell all my friends and family, "hey! Give me some money for my business, and in return I will issue you shares of bleg!" And my family says, "oh cool! great! what does bleg get me?" And I respond, "well it get's you a percentage of the total outstanding bleg, of course!" And my friends ask if owning bleg will get them the chance to vote on how my store is run. And I say "No!" And they say, "If you do really well one year, can we have some of your profits?" And I say "No! You don't get that either!"

No on would want bleg. And no one would think that others might eventually want it, so they should get in early before bleg blows up. No, bleg would flop.

[dpark]

> A rational stock valuation is the NPV of all future dividends.

Investors are not rational. Nor are they able to see the future. Future dividends have next to nothing to do with the present price of GOOG.

> There must be a guarantee that dividends will be paid equally, otherwise there would be no rational way to price the class C stock

What kind of guarantee would you imagine is meaningful in a world where 3 people control all decisions? If they promise today that dividends will be equally split, what stops them from tomorrow saying that class C gets no dividends?

[jcampbell1]

> Investors are not rational. Nor are they able to see the future. Future dividends have next to nothing to do with the present price of GOOG.

Blah, blah, blah. Let's assume google issued a share that had 1/10 dividend rights and 1/10 voting rights. What would the value of the share be?

A share of stock confers two things. Voting rights, and dividend rights. That is what people are buying. Voting, and dividends.

> If they promise today that dividends will be equally split, what stops them from tomorrow saying that class C gets no dividends?

bylaws

[dpark]

> Let's assume google issued a share that had 1/10 dividend rights and 1/10 voting rights. What would the value of the share be?

A lot more than 1/10 of a standard share, because dividends and voting rights are not the only things of value with respect to a company. In particular, there's also the potential for acquisitions and mergers.

> A share of stock confers two things. Voting rights, and dividend rights. That is what people are buying. Voting, and dividends.

A share of stock confers partial ownership of the company. That's what it confers. It might come with voting rights (or not), and it might come with dividend rights (or not).

Are you actually operating under the belief that the new class of Google will have zero value unless Google eventually issues dividends?

> bylaws

You mean the bylaws that Larry, Eric, and Sergey can change due to their supermajority voting control?

[Drbble]

You should check how much dividend the former shareholders of Instagram or Plumtree received.

[adrianbg]

I have longstanding confusion on this subject. What if dividends are never paid? To my layman's intuition it seems like a more sensible basis for stock valuation is as a fraction of the value of the entire company. This is only equivalent to your definition if profit is equivalent to dividends.. right?

[coopdog]

If they were never paid one day either the company finally dies or it gets wound up. On wind up day, assuming the company was profitable there'd be one huge pay out (ie dividend)

More realistically if you look at Microsoft and Apple, they were trying to never pay dividends, but they finally just had so much cash it was the only sensible thing to do

[adrianbg]

I don't agree. A company can never pay dividends then be bought out by a company that also never pays dividends.

I'm thinking now that there are two components to a stock's value: a concrete component, since a share represents a part of the company, and a volatile abstract component depending on the amount of market demand for it at the moment (eg. in case of a hostile takeover).