Dividend Discount Model
... a stock is worth the present value of all the dividends ever to be paid upon it, no more, no less... Present earnings, outlook, financial condition, and capitalization should bear upon the price of a stock only as they assist buyers and sellers in estimating future dividends.
The dividend discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in theory it applies to all cases, since even retained earnings should eventually turn into dividends. That's because once a company reaches its "mature" stage it won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. (Plan "B" would be for the CEO to pursue some insane acquisition, just to gratify his bloated ego.) As Williams puts it,
If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later; if not, then they are money lost.... In short, a stock is worth only what you can get out of it.