-3

Disclaimer; I know it would never happen but I am just curious about how and why the stock market has been chosen to work the way it does - this is just hypothetical.

Companies say they don't offer dividends or suspend the offer of dividends as a means to reinvest capital back into growing the company. This comes with the promise of a larger dividend in future (or a larger company valuation).

If you shuffle the numbers around, this appears to functionally be a loan with a low interest rate and skipping a few tax barriers; paid for by the shareholders.

This seems to disproportionately benefit larger companies as they have more profit they can work with.

Wouldn't it better encourage competition if all companies were required to provide dividends on their shares and if they needed capital their either raised it by selling shares or borrowed it from a lender?

3
  • @DavidAlsh it’s a very large leap to assume profit as a certainty, there are a lot of large unprofitable companies.
    – quid
    Aug 2, 2021 at 8:10
  • I was also incorrect in my assumption that it matters at all. If every company guarantees a dividend proportionate to the amount owned - a company would invest the amount from their profit back into the company, skipping the dividend payment and functionally achieving the same thing.
    – David Alsh
    Aug 2, 2021 at 8:43
  • 3
    "If every company guarantees a dividend proportionate to the amount owned - a company would invest the amount from their profit back into the company". That first clause makes absolutely no sense.
    – RonJohn
    Aug 2, 2021 at 12:25

1 Answer 1

2

Companies say they don't offer dividends or suspend the offer of dividends as a means to reinvest capital back into growing the company. This comes with the promise of a larger dividend in future (or a larger company valuation).

The promise may be there or not.

Dividends have no other purpose than to "liquidate" a tiny fraction of the value of a company. Not "liquidate" in the sense of taking the company out of business, but in the sense to make a part of the company's value liquid.

You see that in the fact that if a company pays a dividend, the share price usually falls by more or less exactly this value on the "ex.-dividend" day. So your net worth before and after the dividend payment is identical.

When a company decides not to pay a dividend, but to keep the money in order to make more profit with it, the money helps the company make profit at their same yield rate as the whole company.

Assume a company's share value is $100. Their business model is such that it always makes 10%, so over the year, they increase their value to $110. If they decide to yield a dividend of, $10, the situation is the same as in the year before.

However, if they don't yield a dividend, but keep the money, they can turn the $110 to $121. That's something you would miss if you'd get the dividend.

They even could go a way in-between and emit a dividend of $1, $5 or $9, and keep the rest in order to make profit of it.

This is completely independent from whether they pay a dividend in the enxt year, in five years, or at all.

2
  • Could the company not reinvest profit first and pay a dividend of the remaining profit (of which we can assume there will be none as it was completely reinvested). This would not be incompatible with the intended objective. I also failed to recognise that a dividend is not proportionate to one's ownership of the company,
    – David Alsh
    Aug 2, 2021 at 8:04
  • Of course they could. That would be a way in-between. And yes, as the dividend is always per share, it is proportionate to the ownership of the company. If you have 1 share, you get $10 dividend (in our example), if you have 100 shares, you get $1000 dividend.
    – glglgl
    Aug 2, 2021 at 8:09

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .