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Actually, he is right. We presume that no one owns shares of a company just for bragging rights. (This might not be 100% true.) We presume that no one owns sha
by mcherm 13y ago
Actually, he is right.
We presume that no one owns shares of a company just for bragging rights. (This might not be 100% true.) We presume that no one owns shares of a company because they're irrational. (This is 100% false. But hey, economics has to assume something.)
People own shares of a company because they can get money for owning it. They can get money by being paid dividends, and they can get money by selling it to someone else after the price rises (or stays the same, or goes down). That other person will only pay for it based on the same thing: dividends paid plus the value of selling it to someone else.
So the total value of the company should be the current value of the company's total future dividends. We calculate it by multiplying the current price by the shares outstanding, but it's presumed to be an estimate of the future dividend stream.
- cbr 13y agoHow does this square with tech companies generally not paying dividends?
- mcherm 13y agoWell, the assumption is that the tech companies aren't paying dividends NOW because they're focused on growth. After they grow they'll pay dividends. Theory and reality may diverge in this instance.
- erichocean 13y agoDividends are not actually the only way to return money to shareholders. Due to the tax situation in the US, it's more efficient to just buy back your own stock (something Apple's been doing a lot lately). Those function more-or-less-the-same as dividends in terms of returning the profit the company has made back to its owners (so they can invest somewhere else, presumably).