So, if we have this picture of organizational life cycles, then we can't have a steady-state economy full of steady-state companies, but instead a hypothetical zero-growth economy would still be full of firms at different stages of the cycle and would oscillate around some average case. Now, connecting back to the idea that the stock buyback as a mechanism of transferring profit from company to stockholder is higher variance than dividends, here's something interesting:
Suppose dividends are the dominant means of effecting that transfer, and you have an opportunity to invest in a startup. You can do that, and if it's successful it'll give you a steady stream of dividends throughout the maturity phase of its life cycle. Even if you hold that stock until it reaches the decline phase and it eventually goes bankrupt, if it had a good successful run your total net present value in that scenario might beat other investments.
On the other hand, with stock buybacks, you lose everything if you hold the stock for the organization's entire life cycle. The existence of a profitable phase and the buybacks guarantees that there will be opportunities to sell that give you a good return, but you do have to take them to get anything at all. It does rather obscure the idea of spending a fixed sum now to gain a future stream of income in the mind of the investor.
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timeasmymeasure
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Date: 2010-04-04 02:42 am (UTC)Suppose dividends are the dominant means of effecting that transfer, and you have an opportunity to invest in a startup. You can do that, and if it's successful it'll give you a steady stream of dividends throughout the maturity phase of its life cycle. Even if you hold that stock until it reaches the decline phase and it eventually goes bankrupt, if it had a good successful run your total net present value in that scenario might beat other investments.
On the other hand, with stock buybacks, you lose everything if you hold the stock for the organization's entire life cycle. The existence of a profitable phase and the buybacks guarantees that there will be opportunities to sell that give you a good return, but you do have to take them to get anything at all. It does rather obscure the idea of spending a fixed sum now to gain a future stream of income in the mind of the investor.