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Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. Th

Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases). And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company. In other words, shareholders will be happier with the cash in their hands than in the company's bank account.

dpark 10y ago
How could cash not affect a company's valuation? This implies that the market isn't merely irrational but idiotic. A company holding a billion dollars in cash and nothing else should be worth a billion dollars (maybe slightly less to account for the risk that the board could squander the money).
- ucaetano 10y ago
  Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the company. Use the cash to pay back the debt. Cash has no influence (with exceptions and edge cases) on a company's enterprise value.
  - dpark 10y ago
    If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.
    - ucaetano 10y ago
      Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.
      - dpark 10y ago
        You quietly changed from talking about stock price to talking about enterprise value, a term which is defined to exclude cash. This is extremely disingenuous. If you want to argue that there is no value in taking over a company for its cash, sure. If you want to argue that the market sees no value in cash, no.
        ghshephard 10y ago
        I think we can all agree, that when an dividend is issued, particularly one that is significant compared to the "Valuation" of the company, that the stock price (excluding normal day-day market and stock volatility) will drop an amount very close to the amount of the dividend. So, for example, let us say that we have a nice monopolistic utility with (for the sake of argument), very little competition. For example, the Electricity and Water Utility in Dubai, UAE. Let us say that the population has stabilized, and that it has $10 Billion in cash, has a nice stable cost structure with no major depreciations in the future, and are generating $10 million in FCF and profit every year, on assets that are worth $1B, and that the risk free interest rate is 1%. If I were an investor, I would pay $11 Billion for this company. The Cash is worth $10B, and the Business is worth $1B (1% of $1B is $10 million). Now, let us say the business issues a special Dividend of $10B. Can we all agree that a rational investor, on the ex-date, would now only spend $1B on this company, instead of $11B?
- marxidad 10y ago
  The market is often an idiot.
ghshephard 10y ago
I'm not sure I understand what you are saying. I receive dividends from a bunch of companies, and, with almost no exceptions, the stock prices drops by almost exactly the dividend value on the ex-dividend date. Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price?
- ucaetano 10y ago
  > Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price? Exactly!
yellowstuff 10y ago
That's wrong. Cash obviously affects the value of a company, as reflected in the stock price. If a company lights $1B on fire the value of the company will go down, if they find $1B in the couch cushions the value will go up. What might be confusing is that one dollar of cash at a company doesn't neatly translate into one dollar of value in the stock price. At a poorly run company with a history of bad acquisitions $1 of cash might be worth 50 cents because investors think that the company will waste the money rather than give it back as dividends. But a growing company might borrow money and have the stock price go up, if investors think it will be invested well.
- ucaetano 10y ago
  See the answer I posted above. Under certain conditions, the same is valid for debt. Capital structure of a company (under certain conditions) has no impact on the value of the company. This is the Modigliani-Miller theorem, it got Modigliani (but sadly, not Miller) a nobel prize. Fine print: there are a bunch of conditions in the case of debt, due to tax, and so on.
kgwgk 10y ago
> cash DOES NOT change a company's valuation That's wrong. As you say later, the Enterprise Value (= Market Cap - Cash + Debt) doesn't change when the company accumulates cash. But the Market Cap increases. Otherwise, how do you balance the equation to keep the Enterprise Value unchanged?

dpark 10y ago

How could cash not affect a company's valuation? This implies that the market isn't merely irrational but idiotic. A company holding a billion dollars in cash and nothing else should be worth a billion dollars (maybe slightly less to account for the risk that the board could squander the money).

ucaetano 10y ago
Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the company. Use the cash to pay back the debt. Cash has no influence (with exceptions and edge cases) on a company's enterprise value.
- dpark 10y ago
  If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.
  - ucaetano 10y ago
    Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.
    - dpark 10y ago
      You quietly changed from talking about stock price to talking about enterprise value, a term which is defined to exclude cash. This is extremely disingenuous. If you want to argue that there is no value in taking over a company for its cash, sure. If you want to argue that the market sees no value in cash, no.
      - ghshephard 10y ago
        I think we can all agree, that when an dividend is issued, particularly one that is significant compared to the "Valuation" of the company, that the stock price (excluding normal day-day market and stock volatility) will drop an amount very close to the amount of the dividend. So, for example, let us say that we have a nice monopolistic utility with (for the sake of argument), very little competition. For example, the Electricity and Water Utility in Dubai, UAE. Let us say that the population has stabilized, and that it has $10 Billion in cash, has a nice stable cost structure with no major depreciations in the future, and are generating $10 million in FCF and profit every year, on assets that are worth $1B, and that the risk free interest rate is 1%. If I were an investor, I would pay $11 Billion for this company. The Cash is worth $10B, and the Business is worth $1B (1% of $1B is $10 million). Now, let us say the business issues a special Dividend of $10B. Can we all agree that a rational investor, on the ex-date, would now only spend $1B on this company, instead of $11B?
marxidad 10y ago
The market is often an idiot.

ghshephard 10y ago

I'm not sure I understand what you are saying. I receive dividends from a bunch of companies, and, with almost no exceptions, the stock prices drops by almost exactly the dividend value on the ex-dividend date. Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price?

ucaetano 10y ago
> Maybe what you are suggesting is that a company with no history of issuing dividends, that starts to issue dividends, will see an increase in the stock price? Exactly!

yellowstuff 10y ago

That's wrong. Cash obviously affects the value of a company, as reflected in the stock price. If a company lights $1B on fire the value of the company will go down, if they find $1B in the couch cushions the value will go up. What might be confusing is that one dollar of cash at a company doesn't neatly translate into one dollar of value in the stock price. At a poorly run company with a history of bad acquisitions $1 of cash might be worth 50 cents because investors think that the company will waste the money rather than give it back as dividends. But a growing company might borrow money and have the stock price go up, if investors think it will be invested well.

ucaetano 10y ago
See the answer I posted above. Under certain conditions, the same is valid for debt. Capital structure of a company (under certain conditions) has no impact on the value of the company. This is the Modigliani-Miller theorem, it got Modigliani (but sadly, not Miller) a nobel prize. Fine print: there are a bunch of conditions in the case of debt, due to tax, and so on.

kgwgk 10y ago

> cash DOES NOT change a company's valuation That's wrong. As you say later, the Enterprise Value (= Market Cap - Cash + Debt) doesn't change when the company accumulates cash. But the Market Cap increases. Otherwise, how do you balance the equation to keep the Enterprise Value unchanged?