>Yahoo doesn't pay dividends, so why on earth would it be "valid"
>to "value" it's stock based on a dividend stream? Similarly, since
>there's no dividends, what do you care about their earnings? They
>aren't sharing any of their earnings (or losses, for that matter)
>with you as a shareholder -- so why do you think this is the way
>to "value" a stock?
From Richard A Brealey and Stewart C Myers, Principles of Corporate Finance, Fourth Edition (McGraw-Hill, 1991), p. 60. Maybe there's a new edition that's gotten more in touch with the New Era. Their use of DEC as a growth stock example is pretty sobering.
>Some companies have such extensive growth opportunities that they
>prefer to pay no dividends for long periods of time. Up to the time
>when this chapter was written, Digital Equipment Corporation (DEC)
>had never paid dividends, because any cash paid out to investors
>would have meant either slower growth or raising capital by some
>other means. investors were evidently happy with management's
>decision to reinvest the earnings. How else can we explain DEC's $15
>billion market value in 1989?
>
>investors are willing to forgo cash dividends today in exchange for
>higher earnings and the expectation of high dividends sometime in
>the future. Thus DEC's common stock is not really a counterexample
>to the statement that stock price equals the present value of
>expected future dividends. DEC's dividends may continue to be zero
>for many years, but they are likely to be positive sooner or later.
>Eventually growth must slow down, releasing funds that can be paid
>to the stockholders. It is that prospect which makes DEC shares
>valuable today.[6]
>
>The inevitable deceleration of rapid growth is illustrated by the
>history of IBM, the most famous growth stock of the period after
>World War 11. IBM has paid dividends since the 1930s, but most IBM
>stockholders bought the stock for growth, not dividends. Throughout
>the 1950s and 1960s the dividend yield (dividend per share as a
>percent of stock price) was very low-usually between I and 2
>percent. Sales, earnings, and dividends grew at compound annual
>rates of roughly 20 percent.
>
>That kind of growth cannot continue forever. By the mid- 1970s IBM
>lacked investment opportunities attractive enough to justify
>continued growth at that rate. Yet its existing businesses remained
>healthy and profitable. Consequently, the firm accumulated cash at
>an embarrassing rate. It had $6.1 billion in cash and marketable
>securities at the end of 1976 and $5.4 billion at year-end 1977. it
>was therefore not surprising to find IBM paying more and more
>generous dividends: In 1978 it paid $2.88 per share on earnings per
>share of $5.32, a 54 percent payout ratio. Also, IBM spent about
>$1.4 billion in 1977 and 1978 to repurchase its own shares. That is,
>IBM distributed cash to its shareholders by buying shares from them.
>As Chapter 16 explains, this is essentially equivalent to paying a
>cash dividend.
>
>IBM's high-payout policy continued in the 1980s. From 1986 through
>1989 it paid out 56 percent of earnings and repurchased 47 million
>shares for $5.66 billion.
>
>
>6 In September 1989, The Wall Street Journal suggested that DEC's
>growth rate was slowing down. It also said that the president of DEC
>believed that the company should start to pay a dividend. "That
>overturns a longstanding strategy of hoarding cash to finance fast
>growth - a stance more suited to a hot start-up company, than the
>mature giant Digital has now become." (The Wall Street Journal,
>September 15, 1989, p. 1.)