this brings back the fond memory of my class discussion on the same topic
back in unversity.
the short answer is that the value of a stock is not related to its dividend
. that being said, dividend paying stocks are favored by certains classes of
investors, and the decrease or disruption of dividends are usually
negatively viewed by the market.
when a company's stock price drops below a certain point, it can be assumed
that someone or a competitor will acquire it to gain control over its
valuable assets (e.g. physical assets, patents, future earnings, claims on
other assets, etc...). the liquidation price sets the floor for the stock
and has little to do with both earnings (postive or negative) and dividends.
for example, if a firm has 20mm in cash and marktable securities, 5mm in
liabilities, -10mm in earnings, assuming the estimated liquidation
procedural cost is 2mm, the value of the stock will not drop too far from
13mm (20 - 5 - 2), even with the negative earnings. that's because someone
can buy the whole firm, stop the business, pay off the liabilities, and
pocket the difference.
also, when its stock price gets closer to the liquidation price, speculators
and investors alike will jump in, hoping for a takeover. in reality,
however, it doesn't need to go that low since the company itself would have
likely bought back shares to lend support.
(as a side note, that's why i don't like dual-class shares, for the weak
down-side support)
in comparison, it's much harder to determine the top of a stock's price,
since beauty is in the eyes of the beholder. as the seller, you can ask for
however much you want, but beyond a certain point, you'll have no bidders.
everyday the stock's price fluctuates between the floor and the top. in the
long run, as long as its earnings ability and underlying assets keep
increasing, both the floor and top will move up in tangent, resulting in
capital appreciation.
the stock price that retail investors buy/sell at is determined on the
trading floor. certain funds or classes of investors prefer dividend paying
stocks for income and other reasons. that fact also makes dividend paying
stocks relatively more expensive.
i think valuating a stock by its "potential" to pay dividends in the future
was an idea set forth by john burr williams in his book "the theory of
investment value". but that's just one framework amongst many others.