The earnings—or rather losses—reported during the bubble were a good predictor of outcomes for dot.com firms. But are earnings the fundamental on which we should focus? The title of my talk suggests dividends as an alternative. Some analysts focus on cash flows, distrusting earnings. In the last ten years, alternative concepts like "comprehensive income," "residual income," and "abnormal earnings" have been advanced. There have been more references to book value. In addition to the profusion of new age techniques, an increasing number of fundamental attributes have been advanced. This requires some sorting out. What matters in company valuation? My conclusion is that earnings should indeed be the focus. However, we must be very careful in buying earnings, for one can pay too much for them. Buying earnings requires a disciplined approach to avoid the risk of paying too much for earnings.
Penman, Stephen. "What Matters in Company Valuation: Earnings, Residual Earnings, Dividends? Theory and Evidence." Presentation, 56 Schmalenbach Betriebswirtschafter-Tag, September 24, 2002.
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