[missedthecue]

The value of the stock is your share in the underlying business. Because underlying business changes over time (hopefully for the better) you are not simply hoping another shmuck pays you more, like with tulips, whose underlying value does not change with time. You own a portion of a concern that is improving its own fortunes.

Furthermore, dividends are approved by the board once per quarter or once per year. A dividend on a stock is not a contractual guarantee like it is on a bond. Therefore, it cannot be a basis of value.

With your logic, Berkshire Hathaway is a long-running greater-fool tulip bubble whose shares are only bidded up by finding more shmucks.

[nestes]

Well, the value of the stock for people who essentially do not have any meaningful control of the business must essentially be tied to the expectation of some liquidity event down the line -- future cash flows. So this could come in the form of dividends, sale of the stock, bankruptcy proceedings, or a purchase of the business.

If I knew for certain (big if) that a business would never have a liquidity event and I couldn't transfer my ownership then it's dead capital for all intents and purposes and you could consider its value essentially $0, right?

[kjshsh123]

But you can transfer your ownership.

[sebastos]

And you can sell your tulip. But if the mania stopped and you suddenly _couldn’t_ find another person to sell it to, would you now be upset you paid $5000 for a tulip? What’s the value at which you wouldn’t be upset? Ok, that’s the intrinsic value of a tulip to you.

[runako]

The thing about a profitable business that is different from a tulip is that it can at any point decide to issue a one-time or ongoing dividend. It can sell off parts to create cash. It has lots of optionality. Public companies have even more liquidity, which creates more optionality.

Even if you don't have immediate liquidity, it would obviously be worth something to have a slice of e.g. Rolex SA. That's obviously different than owning a tulip.

[cavemandaveman]

Berkshire Hathaway doesn't pay a dividend yet the business has steadily grown more valuable

[WarmWash]

Because dividends are stupid and Berkshire is smart. Share buybacks are the optimal way to do "dividends".

The only reason to do a dividend is because people like the feels of getting a cash payout.

[prewett]

Dividends are also one way of income in retirement, much more predictably than selling stock. The yields are worse than bonds, but they can be considered to be mostly to rise with inflation, albeit on a year or two delay. Dividends also act as a discipline to keep management focused on the business, since you need to pay real money to shareholders, instead of just doing whatever good idea you have, regardless of whether it is a net benefit to the company.

[throwaway2037]

I disagree with the last statement. The reason why most companies in the US have at least a nominal (one penny per share) dividend is that many pension funds have a requirement to only hold shares that issue dividends. Pension funds are all tax sheltered, so they don't need to worry about paying taxes on dividends. For retail investors, dividends are mostly worse that share buy backs. Why? Dividends are taxed, and the money needs to be reinvested.

[KellyCriterion]

> The only reason to do a dividend is because people like the feels of getting a cash payout.

Not really, when capital entities came up, the initial goal was to deliver return on invested capital,i.e. something "you get out of the business/back".

Or do you think back in 14th wenn Dutch East India Company was created, that you could by shares and sell them later to a higher bidder after the mission was accomplished? :-)

[jnwatson]

Among the oldest value models, the Dividend Discount Model, says that the value of a company's stock is based on the present value of its future dividend payments.

Even if a company doesn't currently pay dividends, it will eventually do so or be purchased by a company that does. That's the theory at least.

[throwaway2037]

As someone who has been looking at equity "value models" for more than 15 years, I can confidently say it is all bullshit. None of them can explain ("predict") price to earnings ratio or price to book value ratio. Sentiment matters much more in equities than any analyst will admit.

[ozgrakkurt]

This makes no sense. Why doesn’t the “underlying value” of tulips change?

“Underlying value” is a meaningless word btw

[missedthecue]

The underlying value of a tulip is the same as it was in 2000 and 2026. The underlying value of Google is much different in that same time frame.

[ozgrakkurt]

There is no underlying value. It is only how much other people are willing to exchange for it.

So stock marked is always meaningless except considering it is so large and consequanetial and so many people have access to it that it will be rational automagically. This is more of a belief that seems to be fairly correct than a rational line of thinking. This is similar to Democracy in a way

[missedthecue]

You seem to be operating on the assumption that stock values are just totally and completely random and the fact that Google is worth $4T is just as much of a possibility as Hertz Rental Car being worth $1.5B

If you disagree with the above framing, your reasoning will have to concede the existence of underlying value. Yes, obviously the price of a share is the result of the bid and the ask price in the order book. But those prices are based on something, they are not randomly generated. They are based on conceptions of value. The fact that companies with increasing free cash flow over long periods of time always see increasing share prices over time is not random coincidence.

[ozgrakkurt]

That example is a bit extreme but I can give two more normal examples.

Google/Nvidia and Apple/Nvidia. I don't think there is a world where nvidia will make more money than google or apple or keep making more money than them.

Also another one is Tesla. In my opinion, there is absolutely no world where tesla is worth the current stock price if you compare it to chineese companies or some company like Toyota.

Ofc at this point it depends on if you believe the stock market is absolutely correct or if it is correct in these specific examples. We can agree that it is correct in pricing Google higher than a car rental company but it is more complicated.

The prices are based on something but that something is so obscure and complicated that I don't see a way to make a calculation out of it outside of American ideology of stock market/capitalism.

> The fact that companies with increasing free cash flow over long periods of time always see increasing share prices over time is not random coincidence

This is just trivially related imo there is no real calculation between these things . And this relation it is breaking more and more lately as far as I can understand. This might mean stock market ideology is starting to diverge from the real world which is scary

[nl]

It might pay you to look at the numbers.

Last quarter:

Goog: $109B revenue, $62B in profit.

NVIDIA: $81B revenue, $58B in profit.

NVIDIA is growing faster.

I agree about Telsa though.

[bitpush]

Things don't have any inherent value. It is priced at a level that a buyer thinks it is worth.

A gallon of oil can be $3 or $6 depending on whether someone is willing to pay. It can also be $10 but only if people are willing to buy it at $10 if not "prices will come down to match the demand" - another way of saying it would be $9..$8...$7...$6 until it matches a buyer at which point gas is $6.

[ozgrakkurt]

This is what I am trying to express. There is no "inherent price" or "inherent value" there is only the real value that it is bought at (in terms of money). There can be other values (non money) like if someone is willing to swap something for it etc.

[dingaling]

> The value of the stock is your share in the underlying business.

Which for most investors with Class C/D shares is... the square root of zero.

They assert no control over the business, the only way to benefit from the stock is to find another shmuck to buy it at a higher price.

[runako]

The price of a growing business should go up because it has more options to create returns for shareholders.

Use Aldi (revenue ~$120B) as an example. Do you think a person would be a shmuck to buy a slice of it now versus when revenue was $1 million? If not, why not? Your answer will help understand why stock has value even without voting control or dividends.

[dragandj]

It depends. What if Aldi bled a trillion dollars for this revenue of $120B? Would it be a desirable purchase?

[throwaway2037]

Google and Meta have a reasonably similar corporate structure. Most of the voting power is concetrated in the hands of a few. They have both done very well since their IPOs. Do you exclude these companies from your portfolio?

[sebastos]

That’s the story, but it’s bullshit. The underlying intrinsic value of a stock can only be materialized if the company liquidates and you receive a share of the sell off of its assets. How many publicly traded companies abruptly decide they’re tired of the business, stop in their tracks, and liquidate their assets? This only really happens if the company is acquired or if it goes bankrupt. Acquisition is the closest the story comes to truth, but it’s also just forced sale to a greater shmuck. If a company goes bankrupt, a tiny fraction of the current stock price would be realized into cash for common investors because of all the privileged investors and lenders ahead of them, not to mention that the actual value of capital assets etc probably doesn’t cover all the losses (the company’s going bankrupt after all). The value of the underlying capital assets are essentially never returned to the common investors, and the idea that you own a portion of them is in practical terms a lie.

[runako]

> The underlying intrinsic value of a stock can only be materialized if the company liquidates and you receive a share of the sell off of its assets.

This is wildly incorrect. A profitable company can decide to begin paying out dividends, which can eventually return > 100% of the investor's purchase price. A company can issue more stock or bonds to raise cash to pay investors. A company can spin off assets to raise cash to pay investors.

Your framing is very much like a short-term PE investor, and if you look to their playbooks you can see there are many ways for intrinsic value to be realized while leaving an operating business behind. There are any number of stories where PE investors make big profits and then turn around and resell the company for more than they paid.

[sebastos]

The grandparent I was responding to said:

>If a stock never intends to pay dividends, the value of the stock is simply the price the next shumck is willing to pay.

So, by construction, we're talking about the value of shares in a hypothetical company that admits it will _never_ pay dividends. And we're asking what value that stock has BESIDES selling it to another shmuck, so for the purposes of the exercise, it's clearest to just imagine we are not allowed to sell to someone else. Most people will tell you that the stock nevertheless still has value because you own a share of the company itself, which entitles you to a share of its liquidation value. However, the argument I've been making here and in other posts are that:

a. A company tends to be "greater than the sum of its parts". The techno-social arrangement of people and business flows is part of what allows the company to be profitable, so disassembling it, selling off the machinery and returning whatever cash assets it had to the investors is unlikely to cover the market cap (at least, as they are priced today in current climate)

b. Even looking at whatever value IS leftover, the circumstances that lead to you realizing that value are extremely fraught / carry other baggage. It usually doesn't lead to common investors getting value back out, and cannot realistically be a justification for the current valuation of most big non-dividend stocks. For instance, consider how valuable it was to own a share of the underlying capital assets of Bed Bath and Beyond when it declared bankruptcy. It was far worse than just point 'a' ("oh no, we sold all the inventory and real estate it still didn't cover the market cap"). No, if you were a common investor, you essentially got $0 because there were lenders and preferred investors ahead of you in line that consumed those assets and left you crumbs.

c. Acquisitions are the best chance of turning your "ownership of the company itself" into dollars... but this is also slightly cheating, because you're appealing to sale of the shares to another entity again. Now, in real life, if a single entity owned the entire company, it would probably be able to extract some of the business's cash flows (a power which common investors lacked). So it's not quite fair to call the acquiring entity "the next shmuck", since they may be able to realize actual $ value in a way that the common investor couldn't. But technically, if we're playing along with the thought exercise, the premise is that the company continually reinvests in itself and refuses to pay out to the owners. If somebody buys out the company, takes it private, and redirects the profits to their own coffers, the new owning entity is essentially getting dividends by another name.

[hattmall]

It's not purely the liquidation value, it's the idea that the liquidation value will continue to increase, or profits will be paid out to owners.

[sebastos]

Yes, the profits it pays out are the one thing that actually makes sense, but the premise of the grandparent post was to ask what a share is worth _without_ dividends. And the answer is that shares are intrinsically worth very little. Liquidation value (actual liquidation - bankruptcy or going out of business or an exchange closure) is rarely ever practically realized for common investors. Even if you’re trading on the discounted expectation of a larger liquidation pie, nearly 0% is still nearly 0%.

Voting rights are also not valuable by themselves - they are only useful to steer the company towards greater future payouts, which means you are appealing to some other entitlement to value.

If you zoom out, a company is a temporary arrangement of people and things that makes more money than it spends _over time_. They are not really designed to accumulate and store value in and of themselves. The machines the employees use to do the work is a small fraction of the overall utility of a living breathing business. The valuable part is the capacity of this techno-social organism to reliably and continuously make profit, which is far greater than the sum of its parts. So if the profit that’s being earned is never paid out to stakeholders, then there’s no point in being a stakeholder. If the profit is redirected to make the organism bigger, then you are trading now-dollars for future-dollars which must be appropriately discounted. If everyone expects a company to do this forever, then the correct price is what the expected liquidation share should be, and that number is basically zero.

Yet, stocks that do not pay dividends exist at high valuations. What that tells you is that modern day stock trading is tulips: the lion’s share of the value derives from a temporarily stable, shared, _correct_ perception that someone else will buy it back from you.

The reality is that general investors are the greater fools in this arrangement. The prevalence of preferred stock is a tell that there are owners and there are “owners”. What we should do is recognize this and admit that the big initial investors and employees themselves are the owners, because they are the group small enough to actually realize liquidation value (should it ever be necessary). The public investors have no realistic claim on that value, so their shares should be more clearly labeled as dividend rights, which would cause them to be priced as such.

[cman1444]

By this logic all money is inherently worthless too, and every time you buy a sandwich at the local corner shop you're just passing off that worthless piece of paper to the next schmuck.

In reality, things have value because people believe they have value. That doesn't mean every company that doesn't pay dividends is a speculative tulip bubble.