Intrinsic Value of a stock
A stock is worth only what you can get out of it. In other words, a stock is the present value of all its future dividends.
P = sum of (dn * (1+r)^n) r = interest rate, dn = dividend in year n
Even if a company retains earnings, it must pay dividends later or all money is lost.
“A cow for her milk
A hen for her eggs
and a stock, by heck,
For her dividends.
An orchard for its fruit
Bees for their honey,
And stocks, besides,
For their dividends.“
The investment value of a stock is the present worth of its net dividends to perpetuity.
For stock with constant dividends, P = d/r
PE = d/(r*e) e=earning per share
or PE = total dividend on common / (r * total earnings on common)