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Why should the market cap be adjusted to reflect dividends? Those have been paid out to shareholders and no longer represent assets of the company.
by thematt 15y ago
Why should the market cap be adjusted to reflect dividends? Those have been paid out to shareholders and no longer represent assets of the company.
- InclinedPlane 15y agoPeople invest in stocks in order to get a return. They pay the price of the stock because they believe the current and future value of the company is such that they will receive a higher amount of money when they sell the stock. Stocks that issue dividends modify that arrangement because one doesn't need to sell the stock at a higher price to receive a return, since the dividend is providing a return all the time.
- ghaff 15y agoThe traditional view of efficient market stock valuation was that the stock price = the net present value of the future dividend stream. Of course, especially in technology, that doesn't really represent how things actually work. But theoretically stock price represents money you'll be paid out over time rather than some greater fool theory. As for the basic point here though. Yes, an investor cares about total returns so dividends can't just be ignored.
- InclinedPlane 15y agoMakes sense. Currently MSFT stock is valued at holding shares for approximately 24 years by that measure. That seems a bit low even so.
- biot 15y agoWhen comparing a dividend-paying stock to non-dividend paying stocks, the dividend-paying stock's price per share should be adjusted to incorporate the dividends paid (for comparative purposes only). As someone else pointed out, even if Microsoft's stock didn't gain a cent you would have made over $6 since 2005 from the dividends paid. Since the comparative price of the stock would get adjusted to reflect this and market cap is a simple product of the price and shares outstanding, it does tangentially impact market cap (again, only for comparative purposes). Though a more direct way of stating this is that the value of the stock should be adjusted to reflect the returns from dividends.
- thematt 15y agoI agree with you then, particularly when you say for comparative purposes only. My contention was that somebody evaluating the stock for purchase today should not include past dividends in the current market capitalization.
- deleted 15y ago[deleted]
- thematt 15y agoThe market returns should be adjusted for dividends. The market capitalization is what it is, simply a reflection of price and shares outstanding.
- amorphid 15y agoSimple example. A company had a market cap of $25. They have $5 in cash and decide to pay out a $5 dividend. The company now has $0 in cash and is now worth $20.