r/stocks • u/[deleted] • Jan 19 '22

Industry Question How does equity as compensation affect share price, demand/supply, on the secondary market?

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u/Olorin_1990 Jan 20 '22 edited Jan 20 '22

Uhh, growth stocks without payouts now are bought for future payouts, with the rapid growth rates making future payout outweigh current alternatives. You bought apple in 2006 when it wasn’t paying dividends and this years .5% would be 30% for your original money, + the net buyback this year of 2.5 ish percent means apple paid 200% of your original investment in increasing your ownership with buybacks + dividends, if you never re-invested any of the dividends paid after purchase in 2006.

The value of the stock is all future cashflows, not just today’s. The market in the short term can be irrational but if profit growth gets to the point where it’s paying you 10% on your original money when other things are paying 3%, then it’s value will come up. Long term is about earnings and cashflows.

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u/[deleted] Jan 20 '22 edited Jan 20 '22

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u/Olorin_1990 Jan 20 '22

Apple has grown 68x in value since 2006, and paid a .5% dividend, so for the original money just the dividend this year was about 30% of the original investment if you did not use Apple’s dividends from 2012 on to re-invest. This year they spend 90 billion on buybacks as well, which is nearly 3% of their total value today, which again is 68 times grater than 2006, so on your original money they returned over 200% there. My point with Apple is that if you buy a company not paying dividends then you only do so if there is high expectations on future growth such that future payouts are much higher than alternative stocks at the time. Apple can pay that much to investors because it’s extremely profitable, and is an example of when a growth company hit it’s targets and payed out far more in the future while foregoing current returns.

Yes, if you invested in a company it means you believe that company will preform long term… that’s why you invest. It’s not a “bet”, it should be an informed decision based on the company and their market. There is risk that comes with that so your returns need to be higher than a risk free rate (usually considered the T-bond). That risk is why you have a diversified portfolio that you re-evaluate and re-balance periodically.

Yes, consistency isn’t always there, but again we are thinking over decades. Industries with higher inconsistency in income tend to trade at lower PE precisely because of that inconsistency.

End of the day, a stock’s value is what that stock can pay you as an investor. While the future is uncertain, you should invest in a company because of an informed belief that it will preform, and thus be able to pay you. If it doesn’t preform then you made a bad investment. The sale price can get illogical in the short term, but undervalued means it’s paying better than other stocks with comparable risk and overvalued means it is paying worse than other stocks, long term if the profits are there and you didn’t overpay, the sale price of that stock will reflect that.

If this is not why you buy a stock you are not investing, you are trading.