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Why would anyone want to own a non-dividend stock?
Posted on 1/31/13 at 8:39 am
Posted on 1/31/13 at 8:39 am
There are only two reasons I can think of at the moment: 1) voting rights, and 2) speculation on a potential buyout.
However, what about this hypothetical. A small business owner wants to go public with his company so he issues $1 million shares of non-dividend paying stock. For the sake of discussion lets say each share IPOed at $1 per share. The owner gobbles up 500,001 shares before the general public and the public follows up by purchasing the remaining 499,999 shares. With that the owner continues to maintain control of his business, removes the threat of a buyout, and gets $499,999 of free capital to inject into his business.
What incentive would the general public have to buy this stock?
However, what about this hypothetical. A small business owner wants to go public with his company so he issues $1 million shares of non-dividend paying stock. For the sake of discussion lets say each share IPOed at $1 per share. The owner gobbles up 500,001 shares before the general public and the public follows up by purchasing the remaining 499,999 shares. With that the owner continues to maintain control of his business, removes the threat of a buyout, and gets $499,999 of free capital to inject into his business.
What incentive would the general public have to buy this stock?
2
Posted on 1/31/13 at 8:47 am to GumboPot
I'm sure someone will have a better answer, but aren't most non-dividend stocks considered growth stocks? You are looking for capital gains, not income.
Posted on 1/31/13 at 8:54 am to rmc
quote:
looking for capital gains, not income.
This
And option trading is more fluid the lower the dividend, usually.
Posted on 1/31/13 at 9:01 am to Trauma14
I don't really know.. ask people that bought google, apple, etc. I believe in buying stocks based on the numbers and if it seems like a value.
Posted on 1/31/13 at 9:24 am to GumboPot
Stocks in theory only pay a dividend if the company believes they can't provide an acceptable return in value to the investor if the company were to keep the cash and use it for the purpose of increasing shareholder value.
Basically, if the company thought they could get the investor a return using that cash, they would not distribute it. So to answer your question, one could argue they want a portfolio composed of companies that feel like they can use their cash to grow, expand, improve their product/processes, etc. A company that pays a dividend could be saying that they are not planning on growing much. Not saying this is always the case but this is the general idea.
Basically, if the company thought they could get the investor a return using that cash, they would not distribute it. So to answer your question, one could argue they want a portfolio composed of companies that feel like they can use their cash to grow, expand, improve their product/processes, etc. A company that pays a dividend could be saying that they are not planning on growing much. Not saying this is always the case but this is the general idea.
Posted on 1/31/13 at 9:29 am to LSU1018
quote:
ask people that bought google, apple, etc.
I have a lot of these stocks in my portfolio. I just buy them because they are recommended by my broker as a good investment based on valuation (present and future) of the company. But does a non-dividend stock have value if you don't have controlling number of shares and cannot appoint yourself to a salaried position within the company? It almost seem ponzi scheme-ish to me when a piece of paper only represents numbers on a book and all you can hope for is that someone else values that piece of paper a little more than you.
Posted on 1/31/13 at 9:31 am to Crbello4Hiceman
quote:
Crbello4Hiceman
Okay, that makes sense.
Posted on 1/31/13 at 9:59 am to GumboPot
quote:
But does a non-dividend stock have value if you don't have controlling number of shares and cannot appoint yourself to a salaried position within the company?
As long as the company itself has value, then any fraction of the company, no matter how small, has value.
quote:
It almost seem ponzi scheme-ish to me when a piece of paper only represents numbers on a book and all you can hope for is that someone else values that piece of paper a little more than you.
Can't you say the same about cash? A dollar bill only has value because someone else is willing to accept it in exchange for something else.
Posted on 1/31/13 at 10:11 am to Korkstand
quote:
A dollar bill only has value because someone else is willing to accept it in exchange for something else.
But a dollar bill maintains it's value because it is sanctioned through the government by force.
Apparently the speculation that a company may get bought out and the underlying shares will increase in value is sufficient enough for people invest in non-dividend stocks. It's really a good deal for the underlying business that is IPO'd. It seems like an interest free lone that you never have to pay back.
Posted on 1/31/13 at 10:25 am to GumboPot
quote:
But a dollar bill maintains it's value because it is sanctioned through the government by force.
The only thing forced is that dollars are legal tender. The value of a dollar is entirely subject to market forces, which can of course rise and fall just like a stock.
Posted on 1/31/13 at 12:34 pm to GumboPot
quote:
But does a non-dividend stock have value if you don't have controlling number of shares and cannot appoint yourself to a salaried position within the company?
Anything has value provided someone else is willing to buy it from you. It doesn't matter why that person may want to buy it, it could be b/c he wants to buy a Christmas present for his kid.
But in most cases it has value simply because if the share price gets too much out of line with what the balance sheet would imply, then some buyout guru will notice and try to snap up the shares on the cheap.
Posted on 1/31/13 at 8:58 pm to foshizzle
Look at BRK-A. It's never split or paid a dividend. It's done ok.
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