Question regarding fixed supply of shares and cash flows (?)
Hello monkeys,
Im reading a finance book and I just can't quite understand what the author means with the following paragraph.
"If the supply of shares remains fixed (i.e in the absence of new equity issues, rights issues, etc.), then the buying pressure from individuals forces up prices, as individuals exchange cash for share ownership. If companies themselves generate cash surpluses that are paid back to shareholders, either as dividends or share repurchases, then the demand-supply imbalance is exaggerated further. Hence, cash flow can "favour the market" even if the underlying fundamentals of corporate wealth creation are unchanged."
The author talks about a demand-supply imbalance. Why would it be a demand-supply imbalance if the supply was naturally just, say 100 total shares in the world. As long as the supply of shares was due to market adaption/response. To me it seems pointless to show a hypothetical world of a fixed amount of shares when in the real world the market responds to demand for stock investment by simply issuing and initiating more public offerings?
He also talks about this D-S imbalance being exaggerated further by dividends / share repurchase? How, why and when? This makes no sense to me as to why the demand and supply would change after for example a dividend being paid out since the dividend should not change demand because the price of the stock would instead simply fall equal to the value of the dividend.
"Hence, cash flow can "favour the market" even if the underlying fundamentals of corporate wealth creation are unchanged."
Now I'm all kinds of lost, how can a cash flow favour the market, what does this even mean? Does he mean that dividend pay outs merely create shareholder value but the fundamental value remains unchanged?
Apologize in advance for any poor grammar since english is not my first language.
Would be very thankful if someone more skilled could clarify this for me! :-)