The Lemon Fool

I have rechecked the results from my ISF dividend spreadsheet and decided to eliminate the dividends before 18 October 2001 (6 of them). This is because there was a very large distribution made on 18 October 2001 of about £3.22 per share and I cannot fully make sense of what this restructuring event was all about. That reduces the sample to 81 dividends, totalling about £4.21 per share, average 5.2p. The average loss in NAV on XD date comes out at 5.7p per share, so not too dissimilar to before.

One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

GoSeigen wrote:I really think there was no need for the OP. Empirical evidence is really not needed here. The key point is that the only differrence between the shares trading cum-div and ex-div the following day is the right to receive the dividend. The value of the business is set by rational people trading, not any magical formula. Any rational buyer will deduct the amount of the dividend from the share price when buying ex-div because they have no right to receive the dividend; any rational seller will also deduct the amount of the dividend from the share price when selling ex-div because they do have the right to receive the dividend. No figures needed to prove or disprove this. It is correct almost by definition.
GS

I know, but some people don't buy theory!

Arborbridge wrote:

dealtn wrote:

Arborbridge wrote:

hiriskpaul wrote:All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

Hmm, maybe I'm naive, but aren't dividends rather better than interest payments? If not, why would anyone take the risk? I've never noticed my capital deposits which produce interest, growing in value as I have my share.

Arb.

They are both cash. What is different is the underlying investments, and their potential to generate cashflows. A cash payment from either has the same impact on your bank account.

You've avoided the point. The equity base grows over time, wheareas the usual fixed interest base doesn't. That is why dividends are more attractive to me than interest: they are not the same.

My understanding was that wasn't the point. You were referring to the dividend and the interest. Now you are talking about the equity base (I am assuming that means the equity capital) which is the same as my "underlying investments", surely. Where do you have a difference of opinion as its not clear, to me at least? What point have I avoided?

tjh290633 wrote:
What the shareholder gains is the opportunity to do what he pleases with his own money. The company might decide to waste it by buying back its own shares.

TJH

Where are these gains? The shareholder has the opportunity to do that at any time by selling (some of) his shares. There is no need to wait for a cash dividend, although for some that is easier, albeit it time constrained.

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

dealtn wrote:

tjh290633 wrote:
What the shareholder gains is the opportunity to do what he pleases with his own money. The company might decide to waste it by buying back its own shares.

TJH

Where are these gains? The shareholder has the opportunity to do that at any time by selling (some of) his shares. There is no need to wait for a cash dividend, although for some that is easier, albeit it time constrained.

Managements with too much cash tend to waste it on buybacks at high prices, acquisitions at the top of a cycle, or branching out into apparently more lucrative areas where they have little expertise and end up with an asset write-down.
Not many companies have enough growth opportunity to justify retaining all their profits within the business.

dealtn wrote:

Arborbridge wrote:

dealtn wrote:

Arborbridge wrote:

hiriskpaul wrote:All true, the fallacy is in believing otherwise - that dividends are like interest payments. False assumptions based on the fallacy are not uncommon and are easy traps to fall into.

Ever come across statements such as "The share price has fallen, but that is OK provided the dividend is maintained"?

For another example, I was once sent a magazine by Hargreaves Lansdown discussing equity income funds and the article actually stated that share price falls were good as it meant the dividend payments bought more units when share prices were low. Utter nonsense of course, relying on the fallacy that dividend payments are equivalent to interest payments.

Hmm, maybe I'm naive, but aren't dividends rather better than interest payments? If not, why would anyone take the risk? I've never noticed my capital deposits which produce interest, growing in value as I have my share.

Arb.

They are both cash. What is different is the underlying investments, and their potential to generate cashflows. A cash payment from either has the same impact on your bank account.

You've avoided the point. The equity base grows over time, wheareas the usual fixed interest base doesn't. That is why dividends are more attractive to me than interest: they are not the same.

My understanding was that wasn't the point. You were referring to the dividend and the interest. Now you are talking about the equity base (I am assuming that means the equity capital) which is the same as my "underlying investments", surely. Where do you have a difference of opinion as its not clear, to me at least? What point have I avoided?

Sorry start again. Dividends are rather better than interest, I wrote, and that is because the capital on which dividends are paid grows, whereas that on fixed interest such as a building society investment, stays constant. Dividends are based on growing equity, and is the reason I believe they are "better" than my building society capital which is fixed.

By the way, ignoring our conversation, I believe this thread has become rather sterile and circular, so I gave up following it. It's back to the old "how many angels can stand on the head of a pin".

Arb.

GoSeigen wrote:The value of the business is set by rational people trading, not any magical formula. Any rational buyer will deduct the amount of the dividend from the share price when buying ex-div because they have no right to receive the dividend; any rational seller will also deduct the amount of the dividend from the share price when selling ex-div because they do have the right to receive the dividend. No figures needed to prove or disprove this. It is correct almost by definition.

GS

But are investors or the market rational? I don't think people in general act rationally, although some people like to think they do, and I find it difficult to view 'the market' as driven by rationality. I don't believe in Fama's theory that investors make rational decisions. It sounds like you do, a view that you're perfectly entitled to hold, of course.

RC

BT63 wrote:

dealtn wrote:

tjh290633 wrote:
What the shareholder gains is the opportunity to do what he pleases with his own money. The company might decide to waste it by buying back its own shares.

TJH

Where are these gains? The shareholder has the opportunity to do that at any time by selling (some of) his shares. There is no need to wait for a cash dividend, although for some that is easier, albeit it time constrained.

Managements with too much cash tend to waste it on buybacks at high prices, acquisitions at the top of a cycle, or branching out into apparently more lucrative areas where they have little expertise and end up with an asset write-down.
Not many companies have enough growth opportunity to justify retaining all their profits within the business.

In which case they can either return capital, or use it to pay off debt (a different type of capital). At all times individual investors can decide if they like the plan, or not, and compare with how the market judges that plan, by way of share price, and decide to sell their shares, or not. There is no need to wait for the 2 or 4 days a year when dividends might arrive.

hiriskpaul wrote:I have rechecked the results from my ISF dividend spreadsheet and decided to eliminate the dividends before 18 October 2001 (6 of them). This is because there was a very large distribution made on 18 October 2001 of about £3.22 per share and I cannot fully make sense of what this restructuring event was all about. That reduces the sample to 81 dividends, totalling about £4.21 per share, average 5.2p. The average loss in NAV on XD date comes out at 5.7p per share, so not too dissimilar to before.

One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

Ok, I did a quick sanity check with the iShares data for VOO, a US listed S&P 500 ETF. Much easier to work with as they have the dividends on the same page as the daily NAV values, so no need to mess about with VLOOKUP's. 89 dividends, average $0.81 per share. Average fall in price on XD date $1.00 per share. "Noise" is much more apparent here as the dividend payments are smaller compared to capital value per share. There were 47 of price falls that were greater than the dividend, ie about half. So the strange split with the FTSE 100 ETF might be just a fluke.

BT63 wrote:

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

Interesting possibility. A behavioural bias unique to the UK market.

hiriskpaul wrote:

BT63 wrote:

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

Interesting possibility. A behavioural bias unique to the UK market.

it might be possible if the number of "people" holding shares was significant compared to less emotional "corporates" holding shares such that a behavioural effect would exist. It was rejected as plausible when I was at business school, and even the larger effect of individual taxation rates over corporate taxation rates would dwarf it. I can't see that the ratio of people/corporate has reversed in the years since I last studied it in any in depth way.

dealtn wrote:

hiriskpaul wrote:

BT63 wrote:

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

Interesting possibility. A behavioural bias unique to the UK market.

it might be possible if the number of "people" holding shares was significant compared to less emotional "corporates" holding shares such that a behavioural effect would exist. It was rejected as plausible when I was at business school, and even the larger effect of individual taxation rates over corporate taxation rates would dwarf it. I can't see that the ratio of people/corporate has reversed in the years since I last studied it in any in depth way.

Although I haven't studied it in detail, I have often invested in high-yield shares over the years and I think that it would be possible for traders with low costs to make a profit from high-ish yielding shares being slightly overpriced before xd.

As an educated guess, I would say that shares fall on average by about 1.25x to 1.5x the dividend amount between the day before xd and the couple of weeks after xd.

It's not logical and it's not efficient market pricing, but I'm convinced it exists among shares with above-average dividend yields.

dealtn wrote:

hiriskpaul wrote:

BT63 wrote:

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

Interesting possibility. A behavioural bias unique to the UK market.

it might be possible if the number of "people" holding shares was significant compared to less emotional "corporates" holding shares such that a behavioural effect would exist. It was rejected as plausible when I was at business school, and even the larger effect of individual taxation rates over corporate taxation rates would dwarf it. I can't see that the ratio of people/corporate has reversed in the years since I last studied it in any in depth way.

UK institutions are guilty of over-valuing dividends in their portfolios as well. I used to sit in on institutional clients when I worked in fund management and a good number of them would want an emphasis on dividends. Some were pension funds and wanted regular cashflows arising, and of course for them taxes were not a problem.

To understand why UK companies pay out an unhealthily large amount of their revenues in dividends, and sometimes even when there are no revenues, is really to understand that that is what UK investors of all types demand. You don't see that in most other countries.

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

Lootman wrote:

dealtn wrote:

hiriskpaul wrote:

BT63 wrote:

hiriskpaul wrote:One odd thing I have noticed is that there are many more drops in NAV on XD date that exceed the dividend than the other way round. For only 7 of the 81 dividends the NAV dropped less than the dividend. Very curious and might be a fluke of course, but does anyone have an explanation as to why this might be the case?

I think people like to receive the dividends so are less inclined to sell in the days leading up to the xd date, then less inclined to buy shortly after the xd date because it's a long wait for the next dividend.

Interesting possibility. A behavioural bias unique to the UK market.

it might be possible if the number of "people" holding shares was significant compared to less emotional "corporates" holding shares such that a behavioural effect would exist. It was rejected as plausible when I was at business school, and even the larger effect of individual taxation rates over corporate taxation rates would dwarf it. I can't see that the ratio of people/corporate has reversed in the years since I last studied it in any in depth way.

UK institutions are guilty of over-valuing dividends in their portfolios as well. I used to sit in on institutional clients when I worked in fund management and a good number of them would want an emphasis on dividends. Some were pension funds and wanted regular cashflows arising, and of course for them taxes were not a problem.

To understand why UK companies pay out an unhealthily large amount of their revenues in dividends, and sometimes even when there are no revenues, is really to understand that that is what UK investors of all types demand. You don't see that in most other countries.

Which of course also explains why the FTSE-100 is barely above its level of 23 years ago. Dividends were pretty much all you got in a generation now.

Could there be a funds problem as well? Equity income funds are popular in the UK and many funds cannot pay income from capital. So might there be some bias due to equity income fund managers prefering to sell on XD date?

BT63 wrote:As an educated guess, I would say that shares fall on average by about 1.25x to 1.5x the dividend amount between the day before xd and the couple of weeks after xd.

I would have thought 1.25x in reflection of dividend taxes that are paid if the dividend is received versus the avoidance of dividend taxation if sell cum-div and buy back ex-div

4% net dividend requires 5% gross dividend before 20% taxation. 1.25x

These are the results for an ETF. The possible preference to sell on XD date may not be the same for individual shares. It may also just be a fluke. I might have a look at a FTSE 250 ETF tomorrow to see if it displays the same behaviour.

The market is way too efficient to have any dividend payout not perfectly adjusted for in the prevailing stock price, all other things being equal.

I suspect that if the observed price falls by more than dividend amount, it is because to pay out dividends, companies must also incur some taxes, so the equity value of the shareholder should fall by slightly more than just the received dividend.

GoSeigen wrote:The key point is that the only differrence between the shares trading cum-div and ex-div the following day is the right to receive the dividend. The value of the business is set by rational people trading, not any magical formula. Any rational buyer will deduct the amount of the dividend from the share price when buying ex-div because they have no right to receive the dividend; any rational seller will also deduct the amount of the dividend from the share price when selling ex-div because they do have the right to receive the dividend. No figures needed to prove or disprove this. It is correct almost by definition.

GS

Absolute rubbish. Once the share has gone XD the dividend is no longer built into the price. It has gone. Nobody buying XD would even think of deducting the cost of a dividend which is no longer there.

You are clutching at straws to prove a non-existent argument.

TJH

hiriskpaul wrote:Could there be a funds problem as well? Equity income funds are popular in the UK and many funds cannot pay income from capital. So might there be some bias due to equity income fund managers prefering to sell on XD date?

It is not unknown for fund managers to artifically increase the income from their fund by switching between shares which are XD and those which are CD. It is an illusory increase because they are buying the income when they switch. I was on the council of an organisation where the advisers proposed such a move for a major fund, resulting from a significant bequest. The advisers were told what to do with their advice.

TJH