Charlottesquare wrote:May I add one point, this thread appears to suppose the market is valuing a company based on its net assets, such that paying out a dividend reduces said assets . But markets do not tend to value companies this way, they value often looking at P/E with expected P/E growth factored in, if the company earned 70p a share in the year without having that 70p to hand, the 70p was obviously not needed to produce those earnings, the company can ceteris paribus earn the 70p next year without the 70p being invested. The 70p may enhance next year's earnings if the company say uses it to reduce debt (reduced interest cost) or if it can expand and invest profitably using all the 70p divs not paid, but it may not, in reality it all depends what the directors have indicated to the analysts may happen and what the analysts and the market believe is possible from the company. Valuation is rarely a substitution where the 70p div moves the price 70p, it may do, it may not, it may move it 35p, it may move it 90p.
ITs quoted with NAV figures are maybe an exception but for trading companies earnings and earnings growth are far more significant valuation factors than assets, especially given that company accounts often do not reflect accurate values re assets and liabilities anyway, they generally feature accounting convention valuations ,e. g if a compay owes £1,000,000 at say 6% interest it is very unlikely the liability in the accounts will be £1,000,000 anyway( measurement of financial instruments per accounting standards))
I think I agree up to a point, or possibly I completely agree, but only you can tell me that!
The way I think about it is that the market values a company based on future expected returns. When a dividend is declared that may very well move the price if the dividend is not bang on what was expected. An unexpected cut for example is not usually welcomed by the market unless there is a damned good reason for it.
After dividend declaration though the market will value the company as declared dividend + "future expectations". The opening value on XD day will just be "future expectations" as the declared dividend will no longer be paid to buyers of the shares. Provided all else remains the same, or substantially so, "future expectations" at close of business the day before XD date will be the same as at the opening on XD date, so the value of the company will drop by the amount of the declared dividend.
To get really nit-picking, the value of the company will fall slightly less than the amount of the declared dividend because the dividend has not yet been paid. The dividend is a known forward dated cash flow and the present value will be less than declared value*. The full value of the dividend does not drop out of the company value until payment date. In practice this will be invisible due to market volatility.
* unless we end up with negative interest rates.