Conference nyoss1::market_investing

    
    you buy non-dividend stocks for growth (growth of the company's
    business and therefore value, and therefore stock price growth). 
    
    If the company doesn't live up to that growth, then there isn't
    much reason to buy a non-dividend stock. 
    
    People though Digital was going to grow at 18-20% when the stock
    price was around 180 and up. That never happened. So they dumped
    it. The price is one-fourth of what it once was. So you are right:
    why buy the stock?
    
    The thing keeping the stock price up now is asset-value. (We are 
    below book value of liquidation.) 

>    you buy non-dividend stocks for growth (growth of the company's
>    business and therefore value, and therefore stock price growth). 
    
    That's just a rephrasing of the greater fool theory.  Why does the
    buyer of your stock buy it?  To sell it to some other fool at a higher
    price?  Why does THAT fool buy?
    
    In break-up situations it may make sense to buy a non-dividend-paying
    stock, on the theory someone will be able to sell the company assets
    and actually realize the perceived value.
    
    The only sensible general answer I've heard is the one mentioned in .0. 
    Anticipation of a future dividend stream.  One day DEC -will- pay
    dividends; when growth slows so much that plowing profits back into
    sales, R&D, etc. does not return enough additional revenue.  Some of us
    hope that is a long way off.
    
      John

RE:.2 by VMSDEV::HALLYB "Open VMSame!"

>> you buy non-dividend stocks for growth (growth of the company's
>> business and therefore value, and therefore stock price growth). 
    
> That's just a rephrasing of the greater fool theory.  Why does the
> buyer of your stock buy it?  To sell it to some other fool at a higher
> price?  Why does THAT fool buy?

You may not need a "greater fool" to sell it.

An good analogy is a "regular bond" paying interest on a regular schedule
and a "zero coupon bond" paying off at maturity.

A zero does not pay interest,  but has a market value at any given point in 
time can be closely estimated knowing the interest rate on regular bonds.  
Likewise,  the market value of non-dividend paying stock can be estimated by 
assuming that it grows until it starts paying a dividend (or liquidates) by
looking at similar dividend paying stocks.


Phil

    Ah, yes, an imputed dividend yield, as it were.  Still, you can't eat
    a picture of a steak, if you get my drift.  Hence, a steak is a much 
    better investment than a picture of a steak.  (Warning:  analogy
    breakdown imminent...)
    
    Suppose Congress passed a law outlawing ALL dividends.  Stock prices
    would immediately fall (in some cases, rise) to the estimated asset
    value of the company.  I.e., the company would only be worth what it
    owns�, possibly a slight premium or discount to allow for short-term
    changes, but not much. 
    
    Or would something else happen?
    
      John
    
    ---------------------------------------------------------------------
    �Insert proper accounting term here for assets minus liabilities etc.

    
    re: .3    ...and a zero coupon bond paying off at maturity
    
    The analogy to a zero coupon bond is a good one, but there's
    a very important difference...  your virtual bond NEVER matures!!
    
    Imagine the following note, which might appear in this conference:
    
       "I recently met with a financial planner from CDI Inc. who
        is promoting a new instrument called a 'Zero-Growth Bond'.
        These bonds have no maturity date, no stated rate, are
        rather volatile, and are issued by growth companies which
        have had negative growth for the last several years.  He
        mentioned that ZGB's have been really hot recently, and
        that I should act quickly.  What should I do?"
    
    Hmmm.  I'd say "you'd better run for the door".
    
       /Jim
    

    
    
    	It seems as if the phrase "greater fool" theory as used in 
    	.0 would apply to any non-income investment: art, gold, land. 
    
    	If so, then the answer to .0's question is: there are
    	plenty of people who believe the future value of a non-income
    	stock will be greater than the present value, so it's worth 
    	buying. Are they lesser fools waiting for greater fools? 
    	

    "Value" doesn't get created from nothing or get destroyed by nothing.
    
    As assets exceed liabilities, "retained earnings" grow and grow. That's
    (hopefully) reflected on the other side of the balance sheet as CASH
    growing and growing.
    
    That value can be "liberated" by selling the stock if you aren't
    getting it in dividends.
    
    My note on Digital's stock price in the other conference
    SUBWAY::DIGITAL_INVESTING is a must read if you are into "value
    investing".

Re: .2,

>     The only sensible general answer I've heard is the one mentioned in .0.
>     Anticipation of a future dividend stream.  One day DEC -will- pay
>     dividends; when growth slows so much that plowing profits back into
>     sales, R&D, etc. does not return enough additional revenue.  Some of us
>     hope that is a long way off.

      There is no doubt under current tax laws that increase in share
      value results in greater shareholder wealth (no double
      taxation).  However, why can't can you have both?  Merck
      as a counter example, pays a 2% dividend and still spends 
      11% of sales on R&D.
      

Re: Value investing,  a colleague next door in finance questioned how
    to get the IRS to recognize a capital loss. He, many years ago,
    looked at the current value of a stock. It was 2x the current
    price and he promptly purchased the shares: the company PanAM.
    The have 1) sold the Asian routes to United, 2) sold the PanAM
    building, and in general wasted the shareholders wealth.


    Regarding Digital:

    BALANCE SHEET -              Q1 FY92            Q2 FY92

    CASH & CASH EQUIVALENTS.... 2,056,745,000     1,694,012,000
    ACCOUNTS RECEIVABLE (NET)   3,175,614,000	  3,373,560,000

    Simple math projects that the in 4 quarters the cash will be down
    to zero.  I certainly hope that doesn't happen.  Q3 cash
    will certainly be an interesting number.

Gim

    
    re: land, art, gold
    
    No, the difference here is that all these have intrinsic value.  You
    can live on land, look at art, and make things out of gold that people
    will buy.  All you have with your stock certificate is a "picture of
    steak", as was suggested in an earlier reply.
    
    re: asset value, cash out if you want to
    
    No, that's the whole point of this argument... you can only cash out
    for more than you bought the stock for if there is someone willing to
    place a higher value on your 'ZGB' than you did.  The question is, why
    would anyone value it any higher, given that the 'bond' never matures?
    
       /Jim
    

RE:.9 by EPIK::FINNERTY

> The question is, why would anyone value it any higher, given that the 'bond' 
> never matures?

The key point is that the stock will,  sooner or later,  mature.  The company
will start paying a dividend,  or will buy back shares,  or will liquidate,
or will be taken over,  or what ever I missed.

The differences between a zero coupon bond and a no dividend stock are:

1) the maturity date is unknown,  rather than known.

And

2) The payout at maturity is unknown,  rather than known.  Not only the amount
   of payout,  but the type of payout.


As an example of all of this,  look at a fictional company:

Goes public at $5 a share and 100,000 shares.
  {does well doing what ever this company does,  has a pile of cash so:}
Year +10 buys back 50,000 shares at $40
  {does bad, "rightsizes" and then:}
Year +20 liquidates for $1 a share.

Notice the investors as a total did pretty well:  The original $500,000 
grew to over $2 million,  with most of the payback in 10 years:  annual rate 
of return on the close order of 14%.

Notice that anyone that bought the stock at the start and sold shares back to
the company in year 10 did even better:  a $5 investment grew to $40,  a 
return on the close order of 28%.

Notice that anyone that bought the stock at year 10 for it's great growth
history,  low PE,  low price to book ratio or whatever reason,  lost out 
big time.  It is true that a company with a great history like this is unlikely 
to sell for a low PE or price to book ratio in year 10,   but humor me.

The future of a company is the important thing to know,  and it is largely
unknowable.


Phil

    
    re: .-1
    
    I can halfway agree with this, but there's still a bit of circular
    reasoning here.  Let's look at the criteria you mentioned, and separate
    out dividends (which is the basic assumption of .0);
    
    1.  The company will buy back shares;  in this case the company places
        a higher value on the non-maturing bond, for unstated reasons.
    2.  The company will be bought out;  in this case another company 
        places a higher value on the non-maturing bond for unstated
        reasons.
    3.  The company liquidates;   in this case you get your share of the 
        assets...  real steak at last!
    
    or
    
    4.  The company starts paying dividends;  right, as stated in .0.
    
    So items 1 and 2 are really saying that you might make money on your
    investment because someone else is willing to pay even more for it than
    you, but this time it's a corporation rather than an individual
    investor.  That's still speculation.
    
    So I'd still conclude that the only intrinsic value is (a) the
    dividends paid and (b) the book value of the stock at liquidation.
    
    To calculate how much the assets are really worth to the shareholder,
    you'd need to estimate the probability that the company will liquidate
    N years hence, and the value of the assets N years hence, and then
    adjust this all for inflation N year hence, i.e.
    
    	prob(liquidation in 0 years) * currentBookValue / 1.0 +
        prob(liquidation in 1 year ) * BookValueIn1Year / inflation1Yr +
    ...
    ...
    ...
        prob(liquidation in N years) * BookValueInNYears / inflationNYr
    
    
    
       /Jim
       

    Remember that stocks, unlike a zero-coupon perpetual bond, also allow
    you legal control of the issuing company.
    
    Theoretically you get to vote in a management team which will do what
    you want; in particular you may pick the time at which dividends will
    be paid or the company liquidated or sold.
    
    That ownership/control right is itself worth something.
    
    So the proper comparison is to a zero-coupon bond mangaged by a board
    of directors elected on a one-vote-per-bond basis.  The board may call
    for the bond to reach maturity at any time.
    
    		-John Bishop

When stock value drops below the "book" value of a company, it is
becomes a prime candidate for a takeover.  Someone else can buy the
stock, take control of the company and do what he/she wants (including
paying a dividend!). 

The value of the company is not worthless; therefore the value of the
stock is not worthless.  One is reflected (very imperfectly) in the
other. If dividends are paid, this is factored into the value of the
stock.

BTW, I heard a claim about 1-1/2 years ago that Digital was planning
on paying dividends "at the right time".  I do not remember specifics;
I believe this was a senior official who did not use his name.  If
things turn around (i.e. profits are consistently good) in 1-2 years,
I fully expect that Digital would announce dividends (and wouldn't
you want to be holding the stock when they do that! :-) )

Collis

> When stock value drops below the "book" value of a company, it is
> becomes a prime candidate for a takeover.  Someone else can buy the
> stock, take control of the company and do what he/she wants (including
> paying a dividend!). 
    
    It would be really great if this were still true today as it was in
    the early 1980s (and before then).  But with all the "anti-takeover"
    measures in place this is less likely to happen.  Uncle Sam is in bed
    with inept management; so what else is new?
    
    In today's fast-changing world the value of corporate assets depreciates
    quicker than in the past.  Buying a company for its assets means you are
    more likely to end up with a rotten steak when you get your "share",
    if you ever get it (i.e., takeover/liquidation).  All the more reason
    to invest for anticipated dividends rather than anticipated growth.
    
      John

    Actually Ken Olsen went public and said that he had discussed the
    possibility of divdends with the Board of Directors some time back.
    
    Even though income was declining at the time, there were no
    "restructuring charges" and no losses, so the talk seemed to make sense
    at the time.

    
    >> Ken Olson ... said that he had discussed the possibility of
    >> dividends ...
    
    This reminds me of an old joke:  
    
        "My prayers have been answered... the answer was NO"   :)
    
    Last night on NBR there was a segment on some companies that were
    liquidating assets, and there was some analysis on how much the common
    might be worth (admittedly taken out of context, sorry):
    
    	"Pre-reorganization the old common stockholders own 100% of 
    	 the common stock of the company.  Post-reorganization those
    	 old common stockholders may wind up holding 2%"
    
    		Martin Whitman, Fund Manager, Whitman Heffernan Rhein & Co.
    
    	"One guideline has been suggested by analysts:  If the bonds of the
    	 bank company are trading at 20 or 30 cents on the dollar, the 
         stock is probably worthless."
    
    		Susan Pratt, NBR
    
    
    	So I believe that the earlier note estimating the value of book
    value may have been rather optimistic.  Furthermore, it is probable
    that the financial health of a company will be worse when it
    liquidates, so using current book value as an estimate of rock-bottom
    sounds even more optimistic.
    
        /Jim
    

    re -1
    
    That was really taken out of context (they were discussing people who
    buy the stocks of companies in bankrupcy)!
    
    There are many cases where liquidation occurs without bankrupcy -
    notably takeovers.  Furthermore, the "book value" of a company
    (especially a mature company) often grossly understates the market
    value.  For example, all of the real estate that a company owns is 
    counted at it's purchase value (even if it was 50 years ago in downtown
    Manhattan).   Similarly, a company with a low book value could be
    selling at many times its book value (as DEC did at $180) based on the
    projected future value of the company.
    
    So why buy a stock that doesn't pay dividends (like DEC)?  Because, IF
    the company grows, the marketplace will believe the stock is worth
    more.  It's squishy, but that's why  :')
    
    
    
    
    
        
    

    Hindsight is 20-20, but...
    
    If DEC hadn't bought back its own stock for "investment" purposes
    over the last 5 years to the tune of a current $1.2B+ paper
    loss, and had instead paid out that $1.2B to shareholders in the
    form of dividend, it would have resulted in a not so insignificant
    $1+ /share/year.
    

    re -18
    
    yes, but....
    
    *Theoretically* this is a zero-sum game.  Is your $1/share based upon the
    total shares outstanding today or based on the shares outstanding at
    the beginning of the 5 year period?  With the larger pool of
    outstanding shares (saying the buyback didn't happen) what would the
    share price be today?
    
    

    Yes, I agree, ignoring the change in the outstanding float after
    the buyback is very simplistic, but when something is out of
    favor, perhaps the supply/demand zero sum game doesn't hold.
    If half of the float of used 1975 AMC Pacers were suddenly to
    disappear overnight, would a used 1975 Pacer's value be double
    tomorrow?  ;-)
    -kb
     

re .20
    
    >    If half of the float of used 1975 AMC Pacers were suddenly to
    >    disappear overnight, would a used 1975 Pacer's value be double
    >    tomorrow?  ;-)
    
    You got me on a technicality.... $0 divided by 2 still equals $0 ! :')
   
    I do agree with you that the psychology of the market does play a big
    part here, but I believe that it plays a role in the valuation of
    stocks that do pay dividends as well.  
    
    The thread that I'm challenging is the assertion made earlier that the 
    only reason that non-dividend paying stocks have value is that there are 
    "greater fools" out there willing to buy them.
                                      

    
    >> The thread that I'm challenging is the assertion made earlier that
    >> the only reason that non-dividend paying stocks have value is that
    >> there are "greater fools" out there willing to buy them.
    
    That's not exactly what was said.  What was said was that it's worth
    paying for growth provided that the growth *eventually* turned into
    dividends, but if a company demonstrates an unwillingness to ever
    pay dividends, then there is much less intrinsic value.
    
     /Jim
    

    It seems to me that the intrinsic value IS there if you take a macro
    view.  The shares represent portions of the enterprise.  If you were a
    large corporate investor (raider?) rather than a small-timer like me,
    the value becomes more apparent.
    
    In other words, what is the price of a controlling interest?  What is
    the *market* value of the company's assets and income stream?  At what
    point does the share price look like a bargain (e.g. the perpetual AT&T
    - DEC rumors :').
    
    So - say I divided myself up into 100 "shares" and sold some on the open
    market.  I promise I will never pay a dividend - so you could argue
    that the share has little value.  However, if you owned 51 shares, I
    would be your slave.  Figure out what the market value of my life-long
    servitude is worth (no snide comments, please!) and you can begin to 
    compute the share price.
    
    I'm sure that "Geoff Muller" shares would sell below the full market
    value of 1/100th of me.  However, if the price got too low, someone
    would probably start picking up shares, driving the price up until a
    balance was reached.
    
    Now, as the market finds out that I'm continuing my education and have
    started working out at a gym, the market value of my lifetime servitude
    may increase.  If the market price of my shares doesn't rise, someone
    will perceive the shares as a bargain.....
    

>    It seems to me that the intrinsic value IS there if you take a macro
>    view.  The shares represent portions of the enterprise.  If you were a
    
    Yes, the shares represent part ownership of the enterprise.  But it is
    nowhere near as simple as you'd like to obtain controlling interest.
    With the blessings of the SEC nearly every large company has some sort
    of anti-takeover "defense" that makes it prohibitively expensive to
    obtain controlling interest and liquidate the company for its assets.
    Or did you sleep through the last half of the 1980s?		    :-)
    
      John