In American novels, well into the 1950’s, one finds protagonists using the future stream of dividends emanating from their share holdings to send their kids to college or as collateral. Yet, dividends seemed to have gone the way of the Hula-Hoop. Few companies distribute erratic and ever-declining dividends. The vast majority don’t bother. The unfavorable tax treatment of distributed profits may have been the cause.
The dwindling of dividends has implications which are nothing short of revolutionary. Most of the financial theories we use to determine the value of shares were developed in the 1950’s and 1960’s, when dividends were in vogue. They invariably relied on a few implicit and explicit assumptions:
That the fair “value” of a share is closely correlated to its market price;
That price movements are mostly random, though somehow related to the aforementioned “value” of the share. In other words, the price of a security is supposed to converge with its fair “value” in the long term;
That the fair value responds to new information about the firm and reflects it – though how...
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