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.
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
24 March 2012
17 September 2011
Dividends and Stock Prices
I've been writing about finance on a regular basis since 2000, yet it took me until this week to get clear in my own mind the significance of the questions: do stock prices fall in value in response to a forthcoming dividend payment? and its related question: if so, why? There is a lot of material about which I am still very naive, I concede.
If I had been asked, I might have remembered some long-distant lesson about two guys whose names each begin with the letter "M," and the notion that dividend policy, in an efficient market, is neutral as to the value of a stock. So I would have denied that any move at all could be predicted with any degree of confidence.
That may still be the "right answer," but I now believe I understand that there is a controversy here, and why. Figuring it out involved wrestling with vocabulary and chronology. My understanding is that the usual process is this: a company will say that it will pay dividends this quarter, and it will set a "record date" in the near future, and a "payment date" about a week after that. The payments will go out to everyone who owns the company's stock -- who is a "holder of record," as of the record date. Hence the term.
But to make things more complicated, two days before the record date comes what is called the ex-dividend date. This exists because it can take a couple of days for a stock transaction to settle: for the necessary paperwork to get done between the time somebody shouts "sold" on a trading floor on your behalf and the time you are in deed a owner of record. Thus, before the ex-dividend date the stock was trading "with the dividend," -- part of what you were purchasing in buying it was the expectationof that dividend. On and after that date, the stock is trading "ex" the dividend.
Intuitively, then, one would expect stocks to increase in value at the time of the announcement and drop in value again on the ex-dividend date. As of the announcement, the stock carries with it the promise of a near-immediate cash rebate, whereas after the ex-dividend day, the stock no longer carries the expectation of a cash payment that it had carried the day before. Why, then, wouldn't it be worth a bit more after the one development and a but less after the other?
But the money doesn't come out of nowhere. The market at the time of the announcement understands that by these cash payments the company will be depriving itself of that amount of cash, and losing the opportunity to re-invest it in something productive. Further (and this was the key to the Miller-Modigliani argument to which I alluded above) the market is indifferent between an increase in the value of the stock by one dollar on the one hand and the pay-off of $1 as a dividend on the other. So these announcements don't seem to produce any increase in value.
There is an arbitrage argument for the irrelevance of the ex-dividend date, too. After the declaration date, everyone in the market knows when the dividend will be paid, and when the ex-dividend date arrives. If this situation were sufficient to create a price drop, then a lot of speculators would rush in a short sell the stock in the days leading up to the ex-dividend day, betting on that price drop. Their short sales would cause the price to fall earlier than that date, perhaps as soon as the day after the announcement. The date itself, then, would be an irrelevance.
The situation is complicated by the issue of taxation. Dividends are taxed more than are capital gains, a fact that may make some investors and traders less willing to buy a stock that has announced a dividend in that run-up to the ex-dividend day than they would otherwise be, and might thus reduce the extent of the drop, if any, on that day.
Theories notwithstanding, there is evidence that there is a decline ceteris paribus on or around the ex-dividend date.
Is the decline equal to the full value of the dividend to be paid, perhaps with some modification for tax considerations? That is another question, and not one I yet want to try to tackle.
If I had been asked, I might have remembered some long-distant lesson about two guys whose names each begin with the letter "M," and the notion that dividend policy, in an efficient market, is neutral as to the value of a stock. So I would have denied that any move at all could be predicted with any degree of confidence.
That may still be the "right answer," but I now believe I understand that there is a controversy here, and why. Figuring it out involved wrestling with vocabulary and chronology. My understanding is that the usual process is this: a company will say that it will pay dividends this quarter, and it will set a "record date" in the near future, and a "payment date" about a week after that. The payments will go out to everyone who owns the company's stock -- who is a "holder of record," as of the record date. Hence the term.
But to make things more complicated, two days before the record date comes what is called the ex-dividend date. This exists because it can take a couple of days for a stock transaction to settle: for the necessary paperwork to get done between the time somebody shouts "sold" on a trading floor on your behalf and the time you are in deed a owner of record. Thus, before the ex-dividend date the stock was trading "with the dividend," -- part of what you were purchasing in buying it was the expectationof that dividend. On and after that date, the stock is trading "ex" the dividend.
Intuitively, then, one would expect stocks to increase in value at the time of the announcement and drop in value again on the ex-dividend date. As of the announcement, the stock carries with it the promise of a near-immediate cash rebate, whereas after the ex-dividend day, the stock no longer carries the expectation of a cash payment that it had carried the day before. Why, then, wouldn't it be worth a bit more after the one development and a but less after the other?
But the money doesn't come out of nowhere. The market at the time of the announcement understands that by these cash payments the company will be depriving itself of that amount of cash, and losing the opportunity to re-invest it in something productive. Further (and this was the key to the Miller-Modigliani argument to which I alluded above) the market is indifferent between an increase in the value of the stock by one dollar on the one hand and the pay-off of $1 as a dividend on the other. So these announcements don't seem to produce any increase in value.
There is an arbitrage argument for the irrelevance of the ex-dividend date, too. After the declaration date, everyone in the market knows when the dividend will be paid, and when the ex-dividend date arrives. If this situation were sufficient to create a price drop, then a lot of speculators would rush in a short sell the stock in the days leading up to the ex-dividend day, betting on that price drop. Their short sales would cause the price to fall earlier than that date, perhaps as soon as the day after the announcement. The date itself, then, would be an irrelevance.
The situation is complicated by the issue of taxation. Dividends are taxed more than are capital gains, a fact that may make some investors and traders less willing to buy a stock that has announced a dividend in that run-up to the ex-dividend day than they would otherwise be, and might thus reduce the extent of the drop, if any, on that day.
Theories notwithstanding, there is evidence that there is a decline ceteris paribus on or around the ex-dividend date.
Is the decline equal to the full value of the dividend to be paid, perhaps with some modification for tax considerations? That is another question, and not one I yet want to try to tackle.
05 November 2010
Failing to Feed the Monster
Overstock held its conference call on Wednesday to discuss third quarter earnings.
You can see the transcript here.
I've also attached their one-year stock chart. As you can see, there was a strong upward move in the early spring of this year. At the vernal equinox, the price was under $15, through May it was repeatedly close to or above $24.
It lost all of that gain over the course of the spring and summer, and was back at $14 in August. Yesterday, November 4, it closed at $13.39.
The stock has also been underperforming the indexes markedly since August, when it reported a second quarter loss of $1.4 million.
On this week's call, OSTK officials discussed another loss, for the 3d quarter, this time of more than $3.3 million, or 15 cents per share.
I maintain some skepticism over the value of Overstock's numbers, a skepticism I explained in posts on my other (now-suspended) blog in February, and before that.
In my humble opinion (and in the opinion of observers who have looked into the matter quite keenly), Overstock created a cookie-jar reserve for itself in 2008. It inflated its 2009 results with the help of that reserve. The problem, though, is that once you start doing that, you'll find it tough to maintain. The cookie jar runs empty, and you have to get ever-more creative.
I suspect that Overstock's creativity has failed, and so it is now reporting the kinds of losses it would have been reporting for some time had it not engaged in trickery. Thus, the hit it has taken on its stock price.
I have no personal position, long or short, on OSTK, by the way. Furthermore, I am not giving financial advice, except to say that if you are going to invest in the stock market in any capacity, you would be an idiot to rely on anything you saw in a blog, including this one. Also, picking stocks for most people is a fool's errand anyway.
Still: there is an empty cookie jar from OSTK's kitchen and a rather bad odor wafting thence.
19 September 2010
The Last of the Eight Days
As I'm sure my readers are aware, because one would have to have spent the past few days in a cave not to be aware of it -- this month marks the two-year anniversary of the most dramatic financial crisis in a couple of generations.
Last year at this time The New Yorker ran a tick-tock piece by James Stewart, called simply "Eight Days," with reference to the period from September 12 to and including September 19th of 2008. So we are now at the two year anniversary of the final of those days.
As my own way, then, of commemorating the insanity of another September, allow me simply to repost something I wrote at the time.
--------------
19 September 2008
Insanity
The relevant regulators in the US and the UK have both now indulged themselves in the ultimate in knee-jerk reactions.
They've banned short selling in a wide range of stocks. Just to be clear: they haven't banned "naked" short selling, or "abusive" short selling, or closed any loopholes on the existing regulations that govern the practive.
They've banned short selling. Full stop. This is the logical equivalent of prohibiting pessimism.
Here's the SEC's press release.
And here's the counterpart from the other side of the Pond.
I have long believed that the history of the United States breaks down into a series of distinct equilibria. Leaving the colonial and revolutionary eras out of account, there have been three republics.
The first began in 1787 and lasted a little more than 70 years, then collapsed into a period of turmoil and civil war.
The second began in 1868, with the enactment of sweeping new amendments that made in effect for a new Constitution. This second republic lasted about 60 years. It, too, collapsed dramatically.
The third republic was up and running as of 1937, when Roosevelt's court-packing plan induced the Justices to acknowledge sweeping new interpretations for the Constitution. It is this third republic that is now crashing in upon us, and the ban on short selling is a sign of that.
You WILL BE CHEERFUL about stock prices. Washington (and London) command it!
The next logical step is a ban on any trade whatsoever at a price lower than the preceding trade on that asset. Unless, maybe, the asset in question is made out of hydrocarbons, in which case that might be reversed.
A hypothetical television commercial comes to mind.
"Crazy country. We'll sell you appliances. We'll make up prices. We'll order ourselves about like we're in a Three Stooges short. Crazy country. Our rules are ... INSAAAAANE!"
Last year at this time The New Yorker ran a tick-tock piece by James Stewart, called simply "Eight Days," with reference to the period from September 12 to and including September 19th of 2008. So we are now at the two year anniversary of the final of those days.
As my own way, then, of commemorating the insanity of another September, allow me simply to repost something I wrote at the time.
--------------
19 September 2008
Insanity
The relevant regulators in the US and the UK have both now indulged themselves in the ultimate in knee-jerk reactions.
They've banned short selling in a wide range of stocks. Just to be clear: they haven't banned "naked" short selling, or "abusive" short selling, or closed any loopholes on the existing regulations that govern the practive.
They've banned short selling. Full stop. This is the logical equivalent of prohibiting pessimism.
Here's the SEC's press release.
And here's the counterpart from the other side of the Pond.
I have long believed that the history of the United States breaks down into a series of distinct equilibria. Leaving the colonial and revolutionary eras out of account, there have been three republics.
The first began in 1787 and lasted a little more than 70 years, then collapsed into a period of turmoil and civil war.
The second began in 1868, with the enactment of sweeping new amendments that made in effect for a new Constitution. This second republic lasted about 60 years. It, too, collapsed dramatically.
The third republic was up and running as of 1937, when Roosevelt's court-packing plan induced the Justices to acknowledge sweeping new interpretations for the Constitution. It is this third republic that is now crashing in upon us, and the ban on short selling is a sign of that.
You WILL BE CHEERFUL about stock prices. Washington (and London) command it!
The next logical step is a ban on any trade whatsoever at a price lower than the preceding trade on that asset. Unless, maybe, the asset in question is made out of hydrocarbons, in which case that might be reversed.
A hypothetical television commercial comes to mind.
"Crazy country. We'll sell you appliances. We'll make up prices. We'll order ourselves about like we're in a Three Stooges short. Crazy country. Our rules are ... INSAAAAANE!"
01 August 2010
Capital One
A passgae from Michael Lewis' book, The Big Short:
"Suddenly [in mid 2002] the market feared that Capital One wasn't actually smarter than anyone else in the industry about making loans but simply better at hiding losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning circumstantial case, the SEC announced that it was investiogating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed."
Lewis cites this as a good example of the sort of situation in which a creative options play can flourish. A large move in stock price, one way or the other, seemed inevitable to Lewis' protagonists. With options, one can in essence bet against stasis, or against the minor incremental moves that cluster near the top of the Bell curve. One can bet in favor of one or the other tail of the curve, indifferent to which. This is precisely what Jamie Mai and Charlie Ledley did, quite successfully, in their alter ego as Cornwall Capital.
"Soon after Cornwall Capital laid their chips [pedantic editor -- "its chips"] on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 options position was worth $526,000. 'We were pretty fired up,' says Charlie."
This is a small point within the big picture of Lewis' book, but one I thought worth preserving here.
"Suddenly [in mid 2002] the market feared that Capital One wasn't actually smarter than anyone else in the industry about making loans but simply better at hiding losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning circumstantial case, the SEC announced that it was investiogating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed."
Lewis cites this as a good example of the sort of situation in which a creative options play can flourish. A large move in stock price, one way or the other, seemed inevitable to Lewis' protagonists. With options, one can in essence bet against stasis, or against the minor incremental moves that cluster near the top of the Bell curve. One can bet in favor of one or the other tail of the curve, indifferent to which. This is precisely what Jamie Mai and Charlie Ledley did, quite successfully, in their alter ego as Cornwall Capital.
"Soon after Cornwall Capital laid their chips [pedantic editor -- "its chips"] on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 options position was worth $526,000. 'We were pretty fired up,' says Charlie."
This is a small point within the big picture of Lewis' book, but one I thought worth preserving here.
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