Williams argued that the value of a common stock was the present value of all the dividends that an investor would receive in the future. A stock does not have a maturity date, so one doesn’t have to worry about principal repayment. One does have to consider the difference in payout stream, because bonds pay a constant coupon for a known number of years, and common stocks pay a dividend stream that can go up or down in the next year. Furthermore, the length of that dividend stream is unlimited.
From today’s perspective, it is generally believed that company earnings, and therefore dividends, will be in a continuing uptrend reflecting the growth in the economy and most businesses. That would not have been obvious to an analyst in 1938. The economy of the United States and of the rest of the world evolved rapidly in the 40 years that Williams would have considered, but there was no great evidence of steady growth.
Ralph Wanger does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.