Question

Several publicly traded firms do not pay dividends, yet investors are willing to buy shares in these firms. Answer the following: (1) Name one stock you know of that does not pay dividends. (2) Does this violate our basic principle of stock valuation? Explain.

Answer 1

There are many companies who do not believe in paying dividend and they will be rather reinvesting the profits back into the business.

1. Amazon is a company which does not pay any dividend.

2. They do not violate basic principles of stock valuation because stock valuation is just not dependent upon the dividend and it should have multiple factors like Cash flows or growth and other factors like profits and revenues so it does not have to be necessarily dependent upon dividend and because dividend is just one of the measure of valuation of stock when discounting it for dividend growth model.

So, it is not violating any fundamental principle of stock valuation by not paying out dividend hence it can be said that these stocks are Always trying to invet profits backback into the business because they believe that they can make a better rate of return.