Undistributed profits or retained earnings are central to the process of investment growth.
The net worth of the company builds up through the reinvestment of undistributed earnings.
Corporate raiders in particular love to find a company with a lot of cash reserves accumulated from retained earnings.
There is a legitimate dispute over how much retained earnings are adequate, and at what level a company should let loose of some cash and distribute it to shareholders.
Overall, retained earnings like the payment of dividends, deliver a powerful message: the company generates more cash than it needs for the operation of the business.
These earnings, over and above total expenses and taxes, drive the share price higher.
- Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings.
- The speculative feature is no mystery. It is the tendency toward excessive and irrational price fluctuations as investors (in Graham's words) "give way to hope, fear, and greed."