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What is the intrinsic value of a company's non-voting stock shares which don't pay dividends?

My understanding is stock ownership has value in the form of controlling the company or receiving a portion of the profits. Where does value derive from when neither of these is present?

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  • $\begingroup$ Also, this article discusses Google's answer to this problem. What are the forces behind Google obligation here? $\endgroup$
    – steampowered
    Commented Dec 4, 2015 at 22:55
  • $\begingroup$ Just a clarification : are you talking about a firm that has issued stocks but has not paid any dividend yet, or a firm that pays dividend on its usual stocks but issues some kind of non-dividend-paying stocks? $\endgroup$
    – Louis. B
    Commented Dec 5, 2015 at 1:07
  • $\begingroup$ @Louis.B I'm talking about both examples. Any time a firm issues a non-voting stock which also does not pay dividends. $\endgroup$
    – steampowered
    Commented Dec 5, 2015 at 2:02
  • $\begingroup$ Ok, but it's really different. Stock prices are ultimately driven by dividends. When a stock price goes up, this means that market anticipates a future increase in dividends (or that the price of time decreases). So buying a stock form a company that doesn't pay dividend yet, is still buying a right to future cashflows. But buying a stock which is design to not pay any dividends, and without voting-right, should have a 0-value to me since you know that you won't ever get any dividends. I'm not sure such stocks exist in real life, do you have any examples? $\endgroup$
    – Louis. B
    Commented Dec 5, 2015 at 2:16
  • $\begingroup$ @Louis.B yes there are lots of examples. Check out the article in my first comment regarding Google. $\endgroup$
    – steampowered
    Commented Dec 5, 2015 at 2:19

4 Answers 4

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Just because a share doesn't presently pay dividends, doesn't mean it never will. The gamble is that eventually, it will pay dividends. So the share's value is the market's estimate of the net present value of a future cashflow discounted by two factors: one, the discount rate to reflect that this is a future cashflow not a present one; and two, the probability the cashflow will start later, or never.

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    $\begingroup$ Does that actually exist?? Why would anyone be willing to gamble on the fact that these shares may be paying a dividend one day? $\endgroup$
    – Louis. B
    Commented Dec 3, 2015 at 21:43
  • $\begingroup$ I suppose the firm might buy the stock back someday as well. But I expect the firm will buy back all the voting shares first.... $\endgroup$
    – steampowered
    Commented Dec 4, 2015 at 22:53
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Standard dividends are not the only cash outlet from company to sharesholder.

One option is stock buy backs. A company could in theory say buy 1 million dollars of shares every year and this would be a form of a dividend. The shareholder could benefit by selling their stock directly or waiting to sell their stock back to the company a later point time.

Another option is waiting for a merger. Often cash is involved in these deals and this is a form of stock buyback/dividends that can realize impressive gains for investors.

A third method that shareholders can access a companies loot is through a liquidating dividend.

So a stock does have intrinsic value even if it doesn't issue dividends.

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  • $\begingroup$ This answer cites several possible reasons to give a stock of this kind value, while other answers only focus on dividends. And these reasons make sense. $\endgroup$
    – steampowered
    Commented Dec 5, 2015 at 2:21
  • $\begingroup$ If you are a venture capitalist, you have a forth option. Expense the money out! Quasi-legal...but popular! So for the company you take control of, have them say pay 2 million dollars a year in "consulting fees" to your parent company. This way you bypass minority shareholders and debtholders. If you are interested in this type of thing read: "The Buyout of America" By Josh Kosman $\endgroup$
    – user2662680
    Commented Dec 5, 2015 at 3:32
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Building off of @EneregyNumbers's answer, one of the major reasons you might buy a stock without dividends or voting power is because these days, firms do a lot more with reinvestment strategies, which aim to appreciate the value of the stock itself. You might prefer a firm to not pay out dividends to you and instead take profits and reinvest them into the firm to make the company worth more, and then eventually the firm can start paying off better dividends. So there might be that aspect of expected return. You could also then sell off your stock otherwise if the value kept appreciating and you still weren't seeing a dividend.

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    $\begingroup$ So the underlying value is basically the hope the stock will someday pay dividends, and the resulting hope causing people to trade them as though they are valued assets. $\endgroup$
    – steampowered
    Commented Dec 4, 2015 at 22:52
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Ordinary shares that do not pay cash dividends offer more to the shareholders.

If listed firms do not pay dividend, they must have investment opportunities which offer high rates of returns. The shareholders may want to receive dividends and prefer reinvesting the proceeds elsewhere, but the boards might have different plan. The board compares the rates of return from reinvesting in new projects and paying dividends to the shareholders. If the return from projects is higher than the return investors are expected to earn by reinvesting the dividends, the board keeps retaining the profits until the opportunity cost of doing so is lower than not doing so.

Many newly listed companies do not pay dividends until much later when they exhaust most high return investment opportunities. Investors usually incorporate the future incremental cash flows from investment projects (of the company) in share prices. So share prices rise by the present value per share of the future cash flows from the investments.

Hence, non-dividend paying shares have as much value as those that pay dividend or have voting rights.

Other ways of earning through investing in non voting non divided shares are:

  1. Capital Gains i.e. stemming from investment strategies etc.
  2. Stock dividends
  3. Stock splits
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  • $\begingroup$ "the board keeps retaining the profits until the opportunity cost of doing so is lower than not doing so" - what if the board times this poorly and misses the correct time to start paying dividends? For example, what if the company matures past the point where the company has no high-yield internal investment opportunities, but the board is delusional and continues to reinvest, effectively overvaluing internal investment over shareholder opportunities. Such a board screws the shareholder and pays no dividends. Good luck convincing the board to start paying dividends. $\endgroup$
    – steampowered
    Commented Dec 7, 2015 at 17:07
  • $\begingroup$ The board will be given final farewell in the next annual general meeting if they do not maximise shareholder value. In efficient markets, board decisions are analysed rigorously by zillions of financial analysts whose reports are purchased by shareholders. There are theories in corporate finance related to what you are implying regarding board behavior. $\endgroup$
    – london
    Commented Dec 7, 2015 at 17:15
  • $\begingroup$ Who can fire the board if the shares outstanding are mostly non-voting shares? $\endgroup$
    – steampowered
    Commented Dec 7, 2015 at 18:32
  • $\begingroup$ Those who appoint them. This is usually the single main owner who would hold class B shares, class A shares could be non voting. $\endgroup$
    – london
    Commented Dec 7, 2015 at 20:51
  • $\begingroup$ So the holder of non-voting shares is hoping the holders of voting shares will act in the best interest of the holder of the non-voting shares. Hopefully those interests never diverge - because the non-voting shareholder has no recourse. $\endgroup$
    – steampowered
    Commented Dec 8, 2015 at 14:38

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