At its most basic level, a share represents future profits and partial ownership in a company’s property.
As we have recently mentioned in a post, companies have three main ways to use surplus cash flows:
- Turn those profits back into business.
- Return profits in the form of dividends.
- Return profits in the form of a buyback.
Today we are going to focus on dividends. We will show how the payment of dividend affects share prices and will see which types of companies are more likely to pay dividends.
Chart 1: A company aims to earn profits, which they can reinforce or return to shareholders
Dividend reduces the property of a company – which should also affect prices
It is often said that a share represents partial ownership in future profits of a company. Payment of dividend does not change clearly Future Profit. But this definitely reduces the pure property of the company – equal to the dividend by an amount.
Which raises a question: How much does the payment of dividend replace the value of a company and therefore, the share price of the company?
Being pre-dated
Every time a company pays dividends, there are some important dates to keep the track to show in Chart 2.
For investors, the pre-inter-date date (pre-stallest for short) is the most important. This is the date when the buyers of the stock no longer receive the pending dividends. Because of that, this is also the date when the company’s share price is adjusted for dividend payment.
In short, an investor who buy stock:
- First East-Tarikh will be settled and will be “on record” in time to pay dividends.
- On or later Pre-earlier time will not be on records, and therefore they will not receive dividends.
Chart 2: Dividend Timeline
However, those who bought East For the east-day, there is still a need to wait until the actual salary date, when cash dividend payment is actually distributed, to get cash.
It can cause a “cash drag” in a portfolio, especially if the market appreciates, while the portfolio is waiting to get cash, as it cannot “reinstate” dividends in other shares without taking advantage of the fund.
In practice, many professional investors will buy an exposure for these cash lacquer using futures, which does not require cash disposal, but still gives an explosive stock market exposure.
What happens when someone pays a stock dividend?
In theory, an investor should be ready to pay less for a stock that does not come with dividends – compared to one. And, the dividend is paid in cash, it is easy to calculate the difference in evaluation. Easily, a stock should fall from the exact amount of the dividend as it goes pre-elaborate.
- East-day opening trade What starts stock trading for the first time Without Right to receive upcoming dividends.
- First closed trade What does the last time start stock trading with Right to receive upcoming dividends.
- Therefore, we should give the most accurate estimation of dividend effects from pre -closing value compared to the initial value (as unlike the closing or looking at intraday returns).
Using a real example (below), we try to imagine pre-profit effects on PepsiCo’s (PEP) stock around our pre-Tarikh of December 2024. We see that the price of PEP really fell overnight as it became pre-profitable (blue line in Chart 3).
Chart 3: PepsiCo (PEP) vs. Coca-Cola (KO) on 6 December 2024
In this case, we see the price-reaction of Pepsi’s stock (PEP, blue line) around the East-Tarikh:
- East-Tarikh is December 6, with a dividend of $ 1.35 per share is payable.
- The stock price fell from $ 160.49 (at the end of 5 December) from $ 159.35 (early 6 December).
- It is a drop of $ 1.14 ($ 0.21 less than dividends, or better).
- Return, including dividend ($ 0.21), is equal to a positive withdrawal of 0.13%.
A lot can happen throughout the night, such as market news, company news and change in market spirit. It can separate more or minimal open performance from dividends.
So, the next next question is: There were some positive news that helped promote pre-profit stock for that 21 cents?
Given that both PepsiCo and Coca-Cola are in the same industry and usually have high positive correlation (~ 0.70), we can “control” to pre-profit effects by comparing KO.
The fact is that KO (Red Line) does a high trading between closure on 5 December and it seems open on 6 December that there may be some positive news, or feelings about the industry overnight. In fact, the KO was about 0.30% in the pre-market session, before opening about the flat.
In short, both KO and PEP experienced positive returns throughout the night of a uniform magnitude (including dividends). It seems that the “real” value adjustment was equal to the dividend.
Does the market always give a discount to the entire dividend on the pre-east?
Using a similar approach, we compare overnight returns in the dividend paid for all American Large-Cap Equity securities in the last five years (through December 2020). However for simplicity, we adjust by the return of the market (instead of a well -corrected pair).
Data shows that on the dates of pre-resolution:
- Many stocks see the fall in their prices Roughly speaking The value of their dividend.
- Although the middle stock only decreases About 90% Of its dividend amount.
- most likelyThe result is a dropLessMore than that.
- A reasonable percentage of shares (~ 20%) sees the increase in prices on the pre-profit date-even after accounting for the market lasts overnight (gray zone in chart 4),
Chart 4: Distribution of Pre-Help Price Response (US Large Cap)
Some stocks fall much more than dividends, (after adjustment to market performance), showing that many other impressive things can occur overnight.
What type of companies pay dividends?
Not all companies pay dividends. For a beginning, dividend is difficult to justify when a company has good development opportunities that require re -renovation of cashflow.
Not surprisingly, data shows that large (more mature) companies are more likely to pay dividends (Chart 5). The same goes to more value-oriented companies-remembering that the price is usually defined as companies with strong income and with low growth rates.
Chart 5: Features of shares with dividends
We also see that companies that are included in more defensive industries, such as utilities, materials, and staples, technology, health care, or telecommunications (Chart 6, Green Bar) pay a greater dividends than peers.,
Although it does not always translate into a high dividendYieldComing from those companies (blue dot). In fact, the highest yield comes from real estate, utilities and telecommunications.
Chart 6: Dividend-paying stock across the industry
What does it all mean
Investors who require regular income stream are more likely to take care of getting dividends. Whereas investors looking for high development companies may require most values appreciation and capital gains.
Regardless, if you are investing in shares, it pays to keep an eye on the pre-elements. And if you see a sudden decline in the price on the pre-east, it may not be bad-this can only be dividend adjustment.
