[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.