Can someone then explain to a layman, why Google shares even have any value? What good is a share, if it's voting power in controlling the company is practically void? Google has never paid any dividend either. Are all the stock investors just speculating that GOOG will pay dividend in the future? Or is it possible that Class B shares will loose their special voting rights at some point so that Class A become instrumental in controlling the company?
The only real value a share has is dividends, and dividend-like things (like share buybacks, the whole company being taken private, etc.).
In theory (and practice) the price of a stock is the expected value of the time-discounted sum of its future dividends.
So yes, people are precisely buying GOOG stock because they believe that at some point in the future, they will pay dividends. Google do, after all, have to do something with all their money one day.
Voting is also not very important. In some cases it might be needed to keep the board/executives in line, but for an individual shareholder, the right to vote is of no importance.
> The only real value a share has is dividends, and dividend-like things (like share buybacks, the whole company being taken private, etc.).
This omits the value of the share itself, as a commodity on the open market. If your claim were true, people would refuse to invest in shares that don't pay dividends.
The primary reason to invest in shares is that they they might grow along with the (a) market as a whole, and (b) the company that issued the shares. Dividends are frosting.
> So yes, people are precisely buying GOOG stock because they believe that at some point in the future, they will pay dividends.
With all respect, do you really want to be pontificating about something you know nothing about? There are plenty of companies that don't pay dividends at all, never have, and yet have many loyal investors, for the best of reasons -- the company is growing along with the value of its stock. Instead of paying dividends, many companies put corporate profits directly back into company expenses, with the expectation that this will grow the company and its stock. And the investors agree.
You are correct about the empirical facts (there exist some companies don't currently pay dividends), but theory is needed to understand that if those company's never paid dividends, they would be worthless.
The fundamental principal is that of the transversality condition, also called the "no ponzi" condition, which states that assets must eventually deliver. If a company pays no dividends forever then the value of its stock is only based on what people are willing to pay in the future, forming a self-reinforcing ponzi-like system. It is generally assumed (I can think of many good reasons for this, like the finiteness of the universe) that such violations of the transversality condition don't occur.
Therefore the value of a share is the expected value of all future dividends. I suspect you also didn't read my post carefully and missed my qualification of "dividend-like" things. E.g. a company might start small, grow, stagnate and be bought by a private equity firm and split into parts that are sold off. At that point, the company has effectively delivered dividends to the private equity firm.
>With all respect, do you really want to be pontificating about something you know nothing about?
Your smugness is unwarranted and reflects badly on your character. I suggest you read some books on economics and try to be a better person.
> You are correct about the empirical facts (there exist some companies don't currently pay dividends), but theory is needed to understand that if those company's never paid dividends, they would be worthless.
But since that is absolutely false, I only need to point out the many companies that don't pay dividends and yet are widely accepted as investments. Here is a list of companies that do not pay dividends:
Note the presence of Google, Amazon and Yahoo on the list -- companies that you have just claimed are worthless investments.
Companies that serve a stable market and that aren't growing any more, will in most cases pay dividends in order to hold onto investors. They take corporate profits and divide them among the shareholders -- that's what "dividend" means.
Companies that are growing, like most modern technology companies, often don't pay dividends. They don't because they need the corporate profits to grow the company.
Many modern high-tech companies do not pay dividends. The stockholders fully understand the reason why (the company is still growing), and those stocks are very attractive to investors because they are growing along with their companies.
> Therefore the value of a share is the expected value of all future dividends.
No, it is the expected value of future growth, regardless of the source (growth and dividends). For God's sake, stop arguing about something about which you know precisely nothing.
Quote: "a company that plans to grow much larger might reinvest its profits back into the company so that it's worth more in the near future. You often see this in technology stocks, where acquiring more customers or increasing the value of each customer will hopefully produce even more revenue in the future—and more profits.
A company might also acquire other companies. This is similar to investing in the company. You can see this happen in very large companies, where it's cheaper and easier to buy an established but smaller company than it is to start a new line of business.
Finally, a company might buy back shares of its stock and retire them, so that every remaining share owns a larger piece of the company and thus becomes more valuable. This strategy makes a lot of sense when the price of the company's stock is artificially low.
In one sense, these strategies have one thing in common: they're all intended to make the company itself intrinsically more valuable, whether by expanding the customer base and product offering, by providing opportunities to enter new markets or capture more of an existing market, or by increasing demand and thus raising the price of the stock itself.
A company which can do this is worth more than gold; a company with a solid business that grows and generates more cash every year is a great company to own. Instead of financing its growth (or operations) through debt, it's free to build up its own equity."
> Your smugness is unwarranted and reflects badly on your character. I suggest you read some books on economics and try to be a better person.
You need to go out and acquire an education. You cannot locate a defense for your beliefs, you have no idea to whom you are speaking, how I made my fortune, and you are certainly not in a position to lecture anyone about equities.
>I only need to point out the many companies that don't pay dividends and yet are widely accepted as investments.
Your logical error is in assuming that if a company that pays no dividends now is considered a good investment, then that must mean that investors don't care if that company never pays dividends. On the contrary, investors don't care if Google pays dividends now, because every dollar Google doesn't pay as a dividend gets reinvested in the company, or at least kept as cash, which enables them to pay more dividends in the future.
If Google simply kept that money forever, that would make it into some weird ponzi scheme that the world has never seen before (and we would have to wait until the end of time to find out). Back in the real world, companies typically do, as your yourself imply, eventually stop growing and start paying dividends.
>you have no idea to whom you are speaking, how I made my fortune, and you are certainly not in a position to lecture anyone about equities.
No one gives a shit about your fortune. I'm done with this, but next time try reading what you are replying to carefully, instead of just blasting out facts.
> Your logical error is in assuming that if a company that pays no dividends now is considered a good investment, then that must mean that investors don't care if that company never pays dividends.
That is not a logical error, it is an uncontroversial fact. In point of fact, investors DO NOT CARE whether a company pays dividends, as long as their capital grows. Do you really think people who invest in Berkshire Hathaway are stupid or misguided? And will you people PLEASE do some reading and stop arguing from a position of ignorance?
> ... investors don't care if Google pays dividends now ...
That's right, and investors also don't care whether Berkshire Hathaway never pays dividends, because it's a very attractive investment, and it has never paid a dividend. If Google's growth curve should flatten, they'll have to pay a dividend. But your claim was that a stock that didn't pay dividends was worthless. It's embarrassingly false.
Quote: "Having delivered an average of one-third of stock returns since, (it was more than 50% in the '70s and 14% for the '90s) the case for dividends is clear. But there is no free lunch here. In periods of economic and market growth, dividend payers typically trail the performance of non-payers. Like now. According to S&P Dow Jones Indices, for the 12 months through November dividend payers in the S&P 500 delivered a 39.6% total return. No need to apologize for that. But the non-dividend payers clocked in with a 46.4% total return.
Ranking the entire S&P 500 by 12-month price gains, seven of the top 10 are dividend holdouts, led by Netflix (NFLX) which has quadrupled in price this year. The others: Micron Technology (MU), E*TRADE (ETFC). Genworth Financial (GNW), Yahoo! Inc. (YHOO), Celgene (CELG) and Boston Scientific (BSX), all of which have at least doubled in price over the past 12 months."
If Larry Page, Sergey Brin and Eric Schmidt announced tomorrow that they would do everything in their power to prevent GOOG from EVER paying dividends, buying back stock, or selling to another company, then that would be catastrophic for the share price, correct? This is a step beyond simply being disinterested in dividends and buybacks in the near term, but you seem to be confusing the two.
Anyone who purchased shares at that point would be doing so because of one of the following
1) They believe that Page, Brin and Schmidt will change their minds
2) They believe that control will be wrested away from Page, Brin and Schmidt by more buyback/dividend friendly management
3) They believe that other people will still buy for reasons 1,2, or 3. This is classic Keynes Beauty Contest investing.
GOOG could still grow its revenues, but if it is guaranteed to never pay a dividend or buy back stock (Berkshire Hathaway doesn't pay dividends but Buffett has said he would definitely pursue share buybacks under certain conditions) or sell its assets, then there is no way to get cash out of GOOG except by trading with other beauty contest investors. The only thing left to anchor GOOG stock value to Google the company is the possibility of bankruptcy.
So yetanotherphd is 100% correct. It's not impossible for people to trade as if there's no connection between a company's future dividends/buybacks/asset sales and its stock price. But that's how you end up buying tulip bulbs for their weight in gold.
The quote you give is irrelevant. One would expect cash-rich dividend holdouts to outperform dividend payers on the basis that dividend holdouts are often companies whose shareholders expect, often based on past performance, will deliver better than market returns with any cash they're allowed by shareholders to keep.
At the same time, dividend payers are valued on the basis that they have distributed part of the assets of the company. Looking at the share price on its own is fairly uninteresting, as that does not take into account the total value to shareholders. If you want to look at total value to shareholders, take the share price and assume that every dollar paid in dividends is immediately re-invested in more shares in the company. Once you do that, companies that pay dividends perform substantially better than if you look at the share price alone.
You didn't refute his point at all.. He said
> You are correct about the empirical facts (there exist some companies don't currently pay dividends), but theory is needed to understand that if those company's never paid dividends, they would be worthless.
Which means that EVENTUALLY, these companies will either pay dividends or their stocks are worthless. You pointed out companies that currently do not pay out dividends, but it in no way refutes his statement.
And I have to say he's right. Why? Because if companies never pay out dividends, you're buying stock where the sole method of making profit is by selling it for a higher price. Yes, it's how the market works, but if stocks inherently do nothing (no dividends/dividend-likes, no voting), then they are inherently worthless.
Simply because a market exists where people buy low and sell high does not mean that stocks can exist without inherent value. It may be true for now, but the person you were responding to said (keyword here) eventually. Otherwise, rocks have just as much value as stock.
EDIT: Two things. One is that I just remembered that Apple recently started paying out dividends in the last year or two. Here's an example of a company that did not pay dividends for a long time and EVENTUALLY started to.
The second thing is that I usually hate downvoting people, but you were incredibly aggressive rather than calmly attempting to understand (or be understood by the person) you were conversing with.
> Which means that EVENTUALLY, these companies will either pay dividends or their stocks are worthless.
Yes, And that is false. IT IS FALSE. There are companies that never pay dividends, but because of continuous growth, are regarded as attractive investments (Berkshire Hathaway is just one of many examples). To avoid any possible confusion, I posted a list of such companies. And I have just added another list below.
A company must either grow, or pay dividends. Investors don't much care which it is, because both grow the investor's capital.
> The second thing is that I usually hate downvoting people, but you were incredibly aggressive rather than calmly attempting to understand (or be understood by the person) you were conversing with.
Yes, which means you downvoted based on the fact that you disagreed with the views I expressed, not based on whether I contributed to the conversation, a violation of HN's voting guidelines.
There is something very simple you need to understand -- the OP was flat wrong, and I was flat right. I posted my views, then I posted my proof. The OP posted his annoyance at my way of expressing the truth, which is, among other things, off-topic.
Quote: "Having delivered an average of one-third of stock returns since, (it was more than 50% in the '70s and 14% for the '90s) the case for dividends is clear. But there is no free lunch here. In periods of economic and market growth, dividend payers typically trail the performance of non-payers. Like now. According to S&P Dow Jones Indices, for the 12 months through November dividend payers in the S&P 500 delivered a 39.6% total return. No need to apologize for that. But the non-dividend payers clocked in with a 46.4% total return.
Ranking the entire S&P 500 by 12-month price gains, seven of the top 10 are dividend holdouts, led by Netflix (NFLX) which has quadrupled in price this year. The others: Micron Technology (MU), E*TRADE (ETFC). Genworth Financial (GNW), Yahoo! Inc. (YHOO), Celgene (CELG) and Boston Scientific (BSX), all of which have at least doubled in price over the past 12 months."
Haha, let's you and I and everybody else start trading rocks. Whether or not the rocks have value don't matter, as long as the price of rocks continue to go up. Will you keep buying the rocks because of this upward growth?
> Yes, which means you downvoted based on the fact that you disagreed with the views I expressed, not based on whether I contributed to the conversation, a violation of HN's voting guidelines.
That.. is not at all what I said, which baffles me as you quoted me yourself. I said the way you presented it, not what you presented. "The OP was flat wrong, and I was flat right". Again, super aggressive. You're not even attempting to understand others anymore, as evidenced by what we said about downvoting.
Plus, if you actually did read the HN guidelines, you would see something like
> When disagreeing, please reply to the argument instead of calling names. E.g. "That is an idiotic thing to say; 1 + 1 is 2, not 3" can be shortened to "1 + 1 is 2, not 3."
Some of your comments, not just this one, clearly violate that.
If you want to have a serious discussion regarding the value of stocks in society, then message me. If not, I'll just stop replying because it's not worth my time otherwise.
EDIT: I forgot to say that you're looking at transactions at the micro level. You need to look at the grand scheme of things. Why buy stocks at all? What if we took these companies histories to a decade from now? Two decades? Half a century? To infinity? Look at the theory behind what drives the market, not simply what today's market price is.
You buying stocks to sell for higher doesn't refute the theory behind the entire system.
Are you kidding? If I can buy the rocks at $4 per rock and I'm pretty sure I'll be able to sell them to somebody later at $6 per rock, absolutely I'll keep buying the rocks.
GOOG shares have value because the company has value. They represent a fraction of that value but not an equivalent fraction of management control. Class B shares will eventually all be class A, Eric has converted a tremendous number of his already (they convert when you sell them, its possible they convert on change of ownership which would change them when they were inherited). So fractional ownership represents the fraction of what someone might have to pay to have full ownership.
It's a betting game, upheld by the assumption that as bad as it is, it is the best method we've got to determine the 'value' of a thing (you reach some interesting philosophical questions very quickly this way).
John C. Bogle has written angrily at length about this many times in the past. I don't know enough to say whether I agree with him or not, but "The Battle for the Soul of Capitalism" was a fun read. He basically pushes forward his thesis that many problems related to corporations and corruption have to do with a transition from "shareholder capitalism" to "manager capitalism".
I read it so long ago that I'm distorting things, but I will always remember that it was way better than the stupid title made it seem.
Well if you take away dividends and voting rights, what remains? I can think of two things:
One, money for Google, at least when they were distributed shares (I don't know if they distribute more from time to time).
Two, a tradeable product. Price determined by supply and demand, supply / demand generated by people wanting to bet the price goes up and people cashing in. Think Bitcoins.
I just have to ask. If it really is that way, what would prevent the maintainers of open source projects to issue (more or less worthless) "shares" of their projects? Could this be a way to pay open source developers?
Issuing shares to the public (that is to say, not to a restricted group of sophisticated investors) is far more difficult and expensive than just taking donations.
Here in Australia a proprietary company can't take investment from (or even offer the opportunity to) more than 20 people in a 12 month period, can't have more than 50 non-employee shareholders, and the people you make the offer to have to be classified as "sophisticated" investors (which is a specific term that basically boils down to having a lot of money and thus probably not being naive to the way investments work.)
If you exceed those thresholds then you have to register a prospectus with the Australian Securities and Investment Commission and there are mountains of guidelines, laws, and red tape to wade through to meet all the criteria in the Corporations Act.
It would be far better for OS projects to sell upgrades to their software (to avoid having the complications surrounding donations) for a nominal fee, even if the upgrade is open source as well. The motivation to pay for the upgrade would be to keep the project alive rather than get the benefit of the upgrade.
It's like reddit gold, it doesn't do anything I can't already do with reddit enhancement suite for free, but I renew my gold subscription every year because I appreciate reddit and want to see it continue (Eternal September aside.)
Well, there's always capital gains when you sell. I'd say investors aren't buying Google stock because they want to control the company, they're buying Google stock because the people who do control the company are doing a good job.
As with every company that maintains 51% private ownership, they have value because in the future someone might buy them from you for more than what you paid for them.
Or, to put it another way, they have value because people will pay for them, and people will pay for them because they have value. Isn't finance ridiculous?
Well. Some people, like hedge funds or hypothetical corporate-takeovers, will always be interested in paying for them because it's a way to turn money (sitting around) into more money (in the form of a stream of income) - whether through a full-on acquisition, stock buybacks, or due to dividends. Assuming they get a good enough price, naturally.
Other people will pay for them because the first group will pay for them. That's not ridiculous, that's just a transitive property of things being worth money. It's only a problem and a bubble insofar as this group's enthusiasm overwhelms the first group's.
