7 ms·

What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend

What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend date.

spacecowboy_lon 10y ago
And your point is? the ex div share price recovers in most cases.
- icebraining 10y ago
  Recovers do the pre-dividend price or to what the price would be had there been no dividend?
- ghshephard 10y ago
  It never recovers the value of the dividend. That is permanently gone.
- ohyes 10y ago
  Eventually because of profits that go into the next dividend. Otherwise you would just buy each company pre div, sell it a little bit ex div, make tons of free money.
  - ghshephard 10y ago
    Or, alternatively, if there is no likelihood of future cash flow or profit, each issue of the dividend evaporates a bit more of the stock value, until either dividends are canceled, or the company delists.
ucaetano 10y ago
Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases). And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company. In other words, shareholders will be happier with the cash in their hands than in the company's bank account.
- dpark 10y ago
  How could cash not affect a company's valuation? This implies that the market isn't merely irrational but idiotic. A company holding a billion dollars in cash and nothing else should be worth a billion dollars (maybe slightly less to account for the risk that the board could squander the money).
  - ucaetano 10y ago
    Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the company. Use the cash to pay back the debt. Cash has no influence (with exceptions and edge cases) on a company's enterprise value.
    - dpark 10y ago
      If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.
      - ucaetano 10y ago
        Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.
mywittyname 10y ago
This is not true. Most dividends are priced into the value of the stock because they rarely change. Go look at a MSFT, PG or any other stocks that pay regular dividends on Google Finance. You'll see their stock is obviously not influenced by the value of the dividend payment at all. It's impossible to tell when dividends are distributed by looking at the stock price change alone.
- andylei 10y ago
  this is just false. http://finance.zacks.com/stock-prices-drop-during-exdividend-date-3601.html http://finance.zacks.com/stock-prices-drop-during-exdividend... http://www.fool.com/investing/dividends-income/2015/05/30/understanding-ex-dividend-dates.aspx http://www.fool.com/investing/dividends-income/2015/05/30/un... http://www.investopedia.com/articles/stocks/07/ex_dividend.asp http://www.investopedia.com/articles/stocks/07/ex_dividend.a...
  - mywittyname 10y ago
    Theoretically, yes it should impact the price. In practice, you can't identify when a dividend occurred or how much it was by looking at a stock's price. If there was a strong correlation between dividend payments and stock price, one could algorithmically pick out when a dividend occurred and what it's value was. But you can't because it's hidden in the noise of the market movements. If what I was saying was false, then the ex-date of the dividend should always close at a lower price than the previous day. However, it's a coin flip as to whether or not the ex date stock price closes above or below the previous day. This suggests that regular dividends are factored into the price of a stock. You're trying to claim that the ex-date of the stock should close at $previous_close - $dividend every time. But that doesn't happen. When reality and theory disagree, trust reality.
    - ghshephard 10y ago
      If it didn't drop by the amount of the dividend, then people would be making an awful lot of money purchasing stock a day before the ex-date, being the owner of record, collecting the dividend, and then just selling the stock right away.

What the author ignored, is that when dividends are issued, the value of stock (almost) always goes down by exactly the value of the dividend on the ex-dividend date.

spacecowboy_lon 10y ago

And your point is? the ex div share price recovers in most cases.

icebraining 10y ago
Recovers do the pre-dividend price or to what the price would be had there been no dividend?
ghshephard 10y ago
It never recovers the value of the dividend. That is permanently gone.
ohyes 10y ago
Eventually because of profits that go into the next dividend. Otherwise you would just buy each company pre div, sell it a little bit ex div, make tons of free money.
- ghshephard 10y ago
  Or, alternatively, if there is no likelihood of future cash flow or profit, each issue of the dividend evaporates a bit more of the stock value, until either dividends are canceled, or the company delists.

ucaetano 10y ago

Not exactly. If the company is hoarding cash, distributing dividends usually increases the stock price, since cash value is not included in the stock price. This is actually very important to understand, cash DOES NOT change a company's valuation (there are some exceptions and edge cases). And corporate cash is usually invested in low-risk, liquid securities, which return far less than the average cost of capital for the company. In other words, shareholders will be happier with the cash in their hands than in the company's bank account.

dpark 10y ago
How could cash not affect a company's valuation? This implies that the market isn't merely irrational but idiotic. A company holding a billion dollars in cash and nothing else should be worth a billion dollars (maybe slightly less to account for the risk that the board could squander the money).
- ucaetano 10y ago
  Imagine company A, which has no operation, only $1B in cash. How much money do you need to buy this company? The answer is zero. You borrow 1B. Buy the company. Use the cash to pay back the debt. Cash has no influence (with exceptions and edge cases) on a company's enterprise value.
  - dpark 10y ago
    If you need to borrow a billion dollars to buy the company, then you need a billion dollars to buy the company. The fact that you can use the cash the company holds to pay off the loan is irrelevant. All you did was liquidate the company. That doesn't mean it had zero value. It means that it had literally a billion dollars in value. Your broken logic could be applied to literally anything. > Imagine company A, which has no significant cash, only a $1B tire manufacturing business. > How much money do you need to buy this company? > The answer is zero. > You borrow 1B. > Buy the company. > Sell the time manufacturing business to pay back the debt. > Manufacturing capacity has no influence (with exceptions and edge cases) on a company's enterprise value. Or how about this? > Imagine a used Honda Civic, which is a car that costs $10k. > How much money do you need to buy this car? > The answer is zero. > You borrow $10k. > Buy the car. > Sell the car in parts on eBay to pay back the debt. > Car parts have no influence (with exceptions and edge cases) on a car's value. The fact that you can take out a loan to buy something, and turn around and liquidate the parts of that thing to pay back the loan does not mean the thing has no value.
    - ucaetano 10y ago
      Seriously, no. Buying a Honda Civic is buying an asset which has intrinsic value, and can be used to generate value beyond the $ price. Buying cash gives you no additional value. So trust me, the amount of cash does not change Enterprise Value. If you don't believe me, read any valuation materials, such as Damodaran's.

mywittyname 10y ago

This is not true. Most dividends are priced into the value of the stock because they rarely change. Go look at a MSFT, PG or any other stocks that pay regular dividends on Google Finance. You'll see their stock is obviously not influenced by the value of the dividend payment at all. It's impossible to tell when dividends are distributed by looking at the stock price change alone.

andylei 10y ago
this is just false. http://finance.zacks.com/stock-prices-drop-during-exdividend-date-3601.html http://finance.zacks.com/stock-prices-drop-during-exdividend... http://www.fool.com/investing/dividends-income/2015/05/30/understanding-ex-dividend-dates.aspx http://www.fool.com/investing/dividends-income/2015/05/30/un... http://www.investopedia.com/articles/stocks/07/ex_dividend.asp http://www.investopedia.com/articles/stocks/07/ex_dividend.a...
- mywittyname 10y ago
  Theoretically, yes it should impact the price. In practice, you can't identify when a dividend occurred or how much it was by looking at a stock's price. If there was a strong correlation between dividend payments and stock price, one could algorithmically pick out when a dividend occurred and what it's value was. But you can't because it's hidden in the noise of the market movements. If what I was saying was false, then the ex-date of the dividend should always close at a lower price than the previous day. However, it's a coin flip as to whether or not the ex date stock price closes above or below the previous day. This suggests that regular dividends are factored into the price of a stock. You're trying to claim that the ex-date of the stock should close at $previous_close - $dividend every time. But that doesn't happen. When reality and theory disagree, trust reality.
  - ghshephard 10y ago
    If it didn't drop by the amount of the dividend, then people would be making an awful lot of money purchasing stock a day before the ex-date, being the owner of record, collecting the dividend, and then just selling the stock right away.