24 March 2012

Apple Stock Price and Dividends

Apple this week announced that it will be paying dividends. This has set off, or re-invigorated, some fascinating debates, at places such as Felix Salmon's wonderful blog, about the connection between dividends and stock prices.

Neither in theory not empirically is the relationship obvious. Yes, as Felix says, "if cash leaves the company and goes right into shareholders' pockets, the value of what's left behind goes down, not up."  If you treat the payment of a dividend as a one-time event, it necessarily reduces the asset side of the balance sheet, thus also reducing the equity side.

Confirming that conclusion through evidence of actual stock price moves is tricky, though, simply because there are always a number of possible explanations for any given price move. But in 1986 the  "Journal of Financial Economics" ran a study that looked at the value of options for stocks that pay dividends, and movements in the prices of those options around the announcement of a coming dividend. It found that a  decline in the value of the underlying stock is implicit in options prices.

Dividend policy over time is another matter. It is intuitively plausible that a track record of paying dividends makes companies attractive, serving as a signal of their health and rewarding ownership with cash.

Apple hardly needs to signal that it is healthy these days. This leaves us with the question of the "reward" value of a cash payment. Without dividends, my reward for owning Apple is supposed to be the higher price, and my right to sell some of my shares to get the cash. Getting dividends is an easier sort of reward. It is as if a pigeon in a Skinner box no longer has to press the lever to get the pellet of grain -- the experimenter hands the pigeon the pellet. I suppose you'd get lazier pigeons, but over time that would become the more popular box, for pigeons with a choice.

Here's a link to a somewhat more sophisticated discussion of the economics of it.


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