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(21-10-2019, 02:01 PM)RJT Wrote: Just want to get some discussion on this topic. I have been thinking about whether dividend affects valuation.
Theoretically, dividend doesn't affect valuation. Since valuation comes from all the future free cash flow a business, that is, free cash flow after including maintenance capex. Since dividend comes after free cash flow, as part of the capital allocation decision of the business on the ratio between dividend, reinvestment, buyback etc, so whether a company pays dividend or not does not affect valuation such as DCF. And this is the classical textbook case of valuation.
On the other hand, dividend does affect valuation because of time value of money. If a company that never pays any dividend suddenly announce a special dividend tomorrow due to some divestments, market is going to 'value' the stock a lot more than if nothing has been paid out. This make sense because the cash receive today is worth more than one received tomorrow. And in most cases, high dividend paying stocks have been valued based on their dividends i.e dividend growth model. And it also seems to be the case that dividend paying stocks are seen more 'favourable' than one that doesn't pay anything.
Any thoughts? Or both are correct?
Dividend has direct relationship with valuation.
https://www.investopedia.com/terms/d/ddm.asp
https://www.youtube.com/watch?v=7T8sgT-otDU