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Are future dividends the primary value backing that a stock price will rise? (Let's assume that purchase by a competitor is an unlikely event and discount the value this might have).

It seems to me that many stocks are worth astonishingly many times more than their dividends pay, or are likely or even pay. In fact, many companies pay no dividends, and we have no expectation that that they will start paying dividends any time soon. Why buy those stocks?

If your expectation is that their value will go up, it must be because someone else will be will to pay more for it later. However let's imagine even if a company becomes phenomenally profitable, dominates over its competition to an extent that it cannot be acquired, and has lots of cash in the bank, if the company pays no dividends (let's assume its legally bound not to pay dividends for some reason, or has never paid dividends in the past or we have little reason to expect it will pay dividends in the future), where is the value in that stock to a future individual investor?

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A stock is a claim on the profit of a company, along with the voting power to control that company and force it to pay out when you want it to. The value of every stock is defined by the payments (from the profit of the firm) the holder expects to get at some point. If the stock pays no dividends, it is because the stockholders have allowed management to plow that profit back into the firm in hopes of greater dividends down the line.

Notice that payments may be in the form of (1) regular quarterly dividends, (2) special one-time dividends, or (3) stock repurchases. All of these are valid ways of taking the profit of the firm and giving it to the owners.

Are there any firms that intend never to pay anything out? No. That would be some sort of non-profit organization.

Metaphorically, think of asking the following quetion: "What if there is a bank account you keep putting money in but that will never allow withdrawals?" The question describes something that is not a bank account. All accounts eventually pay out, whether to the current owner or to one down the line. Similarly all profitable firms will eventually pay out the wealth they have accumulated for their owners. The value of the an ownership claim on the firm (i.e., its stock price) is exactly what people think the future payouts are worth.

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In addition to dividends, a company may return equity to owners. The taxation of returned equity might be favourable over dividends for the owners in some jurisdictions.

Controlling owner may try to use his position to his benefit in other ways than as being sold or as being a take over target (see Romanchuks answer). Please, consider private equity and an ownership with majority. The major owner may happily collect funds in the form of equity and has plans (and actions) that are not so nice to other minor owners. These include things like well paying managerial job or a well paying customer to other business the major owner owns. I think this is an counter-example to firm intentions in fanrsy's answer.

Some people get value in the form of ESG-matters (environmental, social, governance) by supporting or just being a part of a company whose agenda they believe. Is this slowly increasing tendency (many money managers and investors have considered ESG lately) or just a temporary fashion peak?

Even though the question states that company is not for sale, many stock valuation models consider the value of equity and take into account the residual value of company, for a reason. A company may be sold: there can be a reclaim (or is it redeem?) for the rest of the shares if majority of the owners have already sold their shares. This way the shares will be turned to either money or other shares. This can take place for private and public equity. In this case you should be able to calculate the value of equity (value of assets less debt). A company may be sold in parts, too.

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As the previous answerer has stated, stocks represent ownership interests in a particular company. Suppose the company in question doesn't pay any dividends. Will owning the company be of value?

Let's suppose it's profitable. It will result in the company having positive retained earnings. Eventually, the company will begin to hold a lot of money. It's valuable just to own that company and take its hoard of money. Owners always have an interest in a company's assets.

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  • $\begingroup$ That depends on whether there's a way of realizing a profit from the held assets. $\endgroup$ – user48956 Apr 14 '17 at 21:35
  • $\begingroup$ I'm assuming that a profitable business that does not pay out dividends would eventually have an increasingly large amount of cash. $\endgroup$ – Jarrod Zhang Apr 14 '17 at 22:44
  • $\begingroup$ "...and take its hoard of money..." - how, if not by dividends? $\endgroup$ – Mick May 22 '17 at 16:49
  • $\begingroup$ If you have enough of a stake in the company, then you can direct its actions. $\endgroup$ – Jarrod Zhang May 22 '17 at 23:45
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Control over a company may also be worth something. A money-losing company can be taken over by a competitor, and the combined company may have increased profits as a result of less competition, economies of scale, etc. The money-losing corporation's share price will reflect the possibility of such a take over.

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Ultimately, yes, in almost all cases, belief in future dividends is the only long term value of stock.

Buy-backs / stock re-purchases only have value because of that belief in future dividends: a buy-back just means that future dividends will be divided across fewer shares, thus higher dividends per share.

There are some corner-case rare exceptions where some of the demand for a stock (and hence some of the market price) may reflect something else, in addition to the discounted value of future dividends; for example:

  • I might believe that the company is going to be nationalised, and the State will buy the shares off me at something related to market price.

  • I might want to take over the company to achieve returns in other ways: to integrate vertically, horizontally, or laterally - where the goal might be to increase the returns on my current business, rather than getting dividends from the other business. In theory, in a perfect market, those returns ought to be realisable by the takeover target, and available as future dividends, but the market is unlikely to be perfect.

  • I might want to take control to achieve ends other than cash returns - for example, I might buy up an exceptionally polluting company and close it down or clean it up in the interests of general well-being.

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