ASX Shares Are non-dividend paying shares (e.g. MUS) a ponzi scheme?

I have been reading through a whole bunch of different articles trying to wrap my head around the what determines the true value of a non dividend paying share.

A dividend paying share makes sense to me - you pay $XXX amount to receive % return in the form of dividends. If business is good and this dividend is high -> stock is more valuable and price is rises etc.

What is the inherent demand for non dividend paying shares?

Example - Start of 2017 MUS was averaging $0.025 a share which grew to $0.175 by mid October. The cause of this rapid growth seemed to be the document Mustang released (linked below) that outlined planned rapid growth and the finding of substantial ruby deposits in their land.

If I was already holding stock and this announcement was not made (but ruby deposits were mined and sold for big $$$) would my stock be worth more? Or was the whole spike in share price due to investors buying in due to the announcement?
If the latter is the case I am seriously confused. Am I buying and selling these non dividend paying shares in the hope that someone thinks they can sell it to the next schmuck for a higher price?

PLEASE HELP FILL MY EMPTY HEAD

Announcement

 

Also can anyone explain what happened around 2010 Feb that caused a $100 drop in share prices? The link attached displays communication between company and shareholders at different points in the year.

Alcoa Inc Cdi 1:1

Thanks

 

@TreeGrove - Alcoa - read the company announcements for the period that you're reviewing - there are asset sales, break up or structural changes etc.

 

They reinvest the profits back into the company e.g. more exploration, bigger/better drilling rigs, etc. Anything to boost more profit.

 

@Simon Hampel @ShireBoy is this intrinsic value/profit ever realised in the form of a payout?

e.g. say if I had 10 shares in a small mining company that makes an insane profit year after year but this profit is reinvested. What makes this companies stock price rise? Is it because other investors see they are doing well and think that the next investor will want it for more (betting???) or because the company is actually worth more?

Why would I care about the continually improving profits (due to reinvestment) if I get no reimbursement and the stock price is determined by investor sentiment??

Thanks for bearing with me

 

Berkshire hathaway pays a dividend of..... zero.

Your asking step5 questions without understanding step1.

 

It is generally stocks with predictable income and capital expenses and little in the way of R&D costs pay the highest dividends. These are generally utilities, tollway operators, etc.
If you look overseas, you will see that tech stocks generally pay little in the way of dividends. You would be hard pressed to find on NASDAQ any significant dividend payers.
Apple famously only started paying any meaningful dividends when they had a cash pile in the 10s of billions.
Amazon still doesn't pay any dividends
Will Amazon Start Paying a Dividend in 2018?

Generally you will see stocks that pay dividends are more yield and income plays with lower growth, where as those that don't are more growth plays, that are building their business aggressively or have significant R&D costs.

Also if listed companies have excess capital, they can choose to return it to shareholders by either dividends or share buybacks (where the company buys back its own shares). Tax considerations have significant impacts on which one a particular listed company will choose.

 

@noogie60 thanks, I understand that by investing in themselves they can accelerate the growth of the company as a whole. Why should this growth attract me as an investor if there is no chance of me receiving dividends in the near future? Am I just hoping that other investors jump on the bandwagon after I do because a company has nice growth for a year or two?

 

I am sure someone will be able to untangle my messy questions

 

The company's worth is more and the share price goes up.
People see the cash flow and underlying profits of the business and want to buy in, dividend or not, driving the share price higher.
All listed companies have to have audited accounts publicly released and investors know what to look for in them. People make buy sell decisions based on what they think the business is worth and what the company's growth and profit prospects are- which determines the share price.
Have a look at the Amazon share price - they have never paid a dividend and by any measure it has been a great investment
AMZN : Summary for Amazon.com, Inc. - Yahoo Finance
Its share price has rocketed up over 1 year, 3 years and 5 years.
Their share price increased 60% over the last year
Here's How Amazon.com, Inc. Crushed It in 2017
If they paid out dividends, they would not have been able to grow as much as they have.
They obviously have a major business that is putting pressure on all other US retailers - there is no way they can be a junk business even if they pay no dividends.

 

Why would you not want to grow your capital and maximize profits ??. I don't understand why people leave money In poorly performing shares, such as the previously touted AUI, which has had no growth probably for 10 years and pays less than a 4% dividend after inflation and tax a return of bugger all. For the risk v return may as well leave their money in the bank. With dividend paying shares the share price drops after the dividend is paid so you have gained nothing. You have to wait until a dividend is paid to get your profit. It is often better to sell just before it goes ex dividend rather than collect a dividend because that is when prices often peak. If you want a 4% return on your original investment, you may only need to sell about 1 days gain on a growth stock. if a growth stock has gone up 400% you only need to sell 1% to get your 4% ROI, the next year you may only need to sell, 0.5% the year after may be 0.2%, which is the amount it fluctuates every minute. You need to understand the amazing power of compounding. Look what happened with TLS it was paying dividends instead of investing in the company and funding growth. RFG is another recent example of high paying dividends, but look what happened to its price. Years of dividend gains wiped out in hours.

 

Perhaps what you are actually meaning is that you expect companies to eventually generate free cash (I deliberately don't say profit, because that term can be massaged and subject to accounting vagaries).
If that is the case, then yes, generally shareholders and the stockmaket do expect companies to eventually generate cash. However, the free cash can be put to various uses by the company's board and management
1. Reinvesting in the company - capex, hiring extra staff, R&D, etc.
- Purchasing other companies comes under this as well.
2. Return the cash to shareholders - dividends and buybacks.
Like mentioned above, you don't want the company to crimp its prospects by underinvesting in its future due to paying too many dividends ("eating the seed corn" if you will).
If you read the business websites, you will also see that there are activist investors and hedge funds eg Carl Icahn, Dan Loeb, etc who are pushing companies to release value to shareholders by reducing the lazy cash on their balance sheets and engage in buybacks and pay out dividends.

 

@Fargo and @noogie60 I am by no means slamming growth shares or saying dividend paying shares are better, I am purely trying to understand what drives the value behind the non dividend paying shares.

So a non dividend paying stock Sundance Resources (SDL) has a share price of $0.005 and a market cap of $38.87 mil with 7.77 bil shares outstanding. To make answering my question easier, if no additional shares were bought or sold for a year and SDL had a successful year, would the share price be higher at the end of the year?

Or is the gain/loss in share prices due to the demand from investors wanting to buy in?

 

To clarify - does an actual increase in company assets directly increase the stock price (not indirectly due to investors seeing company success and increasing demand).

 

Yes.

 

It's both. The share price is always determined by supply and demand and the vagaries of buyers and sellers.
In the long run, the company's share price basically reflects its fundamentals as market players will eventually price the company on its fundamentals. The share price can diverge for a some time from fundamentals but in the long run it will go back to that.

Benjamin Graham (Warren Buffet's mentor) put it best with the analogy that in the short run, the market was a voting machine but in the long run is a weighing machine
The Voting and Weighing Machines

 

Thanks for the responses everyone I think I am lacking a few key links in my background knowledge so I will do a bit more reading

 

Impeccable timing.

I'll now unloosen this rope from around my neck. lol.

 

Are you with your neighbour again?