Maybe there are different ways of thinking about it, but here is the way I have been thinking about it... so let me know if there is anything wrong with this:
- when the company makes an unexpected profit of $1-million, the value of the company immediately increases by $1-million. If they pay it to the stockholders directly in dividends, then it decreases by $1-million. If instead they spend it on new equipment for the company, or new locations, or whatever... then yes, it depends on how they spend it what happens. If they purchase $1-million of value for the company with that $1-million, then nothing changes. But if they get ripped off or squander it, the value goes down. If on the other hand, they get an especially good deal then it goes up. But I think those are after-the-fact corrections, where they have lost or gained value unexpectedly after making the initial $10-million.
I guess the difference in the way we're looking at it is that I'm seeing the company as having added value immediately any time its net assets unexpectedly increase, even before they spend it on anything. And it seems like automatically, if the company has more value then the stockholders have more money since they own a piece of the company. Paying the stockholders just seems like a formality, although I suppose there may be reasons for doing it that way.
The only thing I'm feeling now that doesn't quite make sense with the way I'm looking at it, is the issue of buybacks. I guess if I'm right about how it works, then the instantaneous stock price shouldn't actually change at all when they buy back stock. If they had the money and could have used it for something constructive, but instead used it to pay back existing investors, then the price would drop a bit, but that's exactly counteracted by the opposite effect of the pie being split fewer ways, so overall it seems the price should remain the same. Hmmm. So am I just wrong on that? If so, where is my wrong assumption?
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timeasmymeasure
no subject
Date: 2010-04-05 11:34 pm (UTC)- when the company makes an unexpected profit of $1-million, the value of the company immediately increases by $1-million. If they pay it to the stockholders directly in dividends, then it decreases by $1-million. If instead they spend it on new equipment for the company, or new locations, or whatever... then yes, it depends on how they spend it what happens. If they purchase $1-million of value for the company with that $1-million, then nothing changes. But if they get ripped off or squander it, the value goes down. If on the other hand, they get an especially good deal then it goes up. But I think those are after-the-fact corrections, where they have lost or gained value unexpectedly after making the initial $10-million.
I guess the difference in the way we're looking at it is that I'm seeing the company as having added value immediately any time its net assets unexpectedly increase, even before they spend it on anything. And it seems like automatically, if the company has more value then the stockholders have more money since they own a piece of the company. Paying the stockholders just seems like a formality, although I suppose there may be reasons for doing it that way.
The only thing I'm feeling now that doesn't quite make sense with the way I'm looking at it, is the issue of buybacks. I guess if I'm right about how it works, then the instantaneous stock price shouldn't actually change at all when they buy back stock. If they had the money and could have used it for something constructive, but instead used it to pay back existing investors, then the price would drop a bit, but that's exactly counteracted by the opposite effect of the pie being split fewer ways, so overall it seems the price should remain the same. Hmmm. So am I just wrong on that? If so, where is my wrong assumption?