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turdburglar (42.40)

Life Cycle of Stocks



August 04, 2010 – Comments (1) | RELATED TICKERS: AAPL

Companies all fit the same basic life cycle.  Just like people, they more or less fit a rainbow shape.  Some are big rainbows and some are smaller, but they all fit that shape.

The value of a stock is its ability to pay dividends (or be bought out).  That's it.  If a stock never pays dividends or get bought out then it is worthless other than being able to pawn it off on some chump.

I like dividends.  Paying dividends is what stocks are supposed to do.  In the early childhood years of a stock, it doesn't have to pay dividends.  There's value in the potential that it will some day grow up to be a productive dividend-paying stock.  It's worth the wait.  But at some point either the dividends are paid or the potential is lost.  Companies don't live forever.

Sometimes I think people get caught up in the idea that the best days are just around the corner.  But what if these are the best days?  What should a stock be doing during those good days?  Paying dividends.  Exactly.  If you let the best days pass without paying out any profits then there was no point in ever investing in the first place.  The capital was wasted.  The company was a failure.

I guess I see that when I look at Apple.  For Apple, the good times are now.  We can't seriously think that Apple needs to preserve its capital to invest for the day when its phones really take off.  Then it can pay dividends of $1000 every quarter or something.  Nonsense.  The good days are now.  If they don't pay dividends now, when will they pay them? 

You can compare companies to athletes.  At some point the guy is an up and coming prospect.  His value is in his potential.  But as he goes through his career either he wins championships or he doesn't.  After a while he has to realize that his best days are behind him and he needs to produce now before he fades away. 

You can compare companies to people's ages.  How old is Exxon?  I'd say about 50.  Altria is probably 65.  Google is maybe 30.  Small cap companies you've never heard of are like high school and look like they might have promising careers in the big leagues some day.  I'd say Apple is probably about 50.  It's the prime earning years, but we haven't seen any big paychecks yet.  GM is dead.  They paid some nice dividends in their lifetime, but their rainbow is complete (at least in the first incarnation).  Their shareholders will never see another dime. 

You can do a postmortem on companies like GM.  When should GM have been paying out more dividends?  How much is GM stock worth at a point in time know the exact dividend payment schedule that will occur over its lifetime.  There are winners and losers on all stocks.  If you'd bought GM when it was first listed, you'd have made money even if you'd never sold.  It paid you dividends.  If you bought it in the 90's, you lost because you paid for a bunch of potential dividends that never came through.

It's important to think about these things when you are buying a stock.  Some day that stock will be worth nothing and all you'll be left with is the dividends it paid over its lifetime. 

This is the reason I avoid megacap stocks that don't pay dividends.  If it doesn't pay you a dime when it's at a $200B market cap, are you supposed to believe that maybe it will start when it hits a $1T cap?  I don't buy that.  I think sometimes stocks miss their prime.  I think Apple is a blatant example.  If it doesn't pay dividends now, you should not buy it. 

Sometimes you need to kick back with a drink and say "These are the good times."  If you don't, you'll miss your chance.

Because at some point Sickboy's Unifying Theory of Life Kicks in for all of us.  "First you have it, then you lose it, then it's gone forever....The name of the rose is merely a blip on an otherwise uninterrupted downward trajectory."

The pattern is obvious.  Ignore it at your own peril.


1 Comments – Post Your Own

#1) On August 05, 2010 at 3:07 AM, Valyooo (34.75) wrote:

+1 rec for summing up exactly what I was just about to write, well done.

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