eBay Inc. developed a Web-based marketplace at http://www.ebay.com, in which individuals can buy and sell a variety of items. eBay also acquired PayPal, an online payments system that allows businesses and individuals to send and receive online payments securely. In a recent annual report, eBay published the following dividend policy:
We have never paid cash dividends on our stock and currently anticipate that we will continue to retain any future earnings for the foreseeable future.
Given eBay’s dividend policy, why would an investor be attracted to its stock?
Answer:
The investor would receive a return on the investment through share price appreciation as internally generated funds are used to fund growth and earnings opportunities. Thus, investors in eBay would likely approve of this policy, because the company is able to earn superior returns with internally generated earnings beyond what investors could likely earn on their own by investing dividend distributions.