Stock movements often fail to reflect the amount of cash leaving a company’s balance sheet

I’m puzzled by the reaction to a share price when it goes ex-dividend. By paying a dividend, cash of a certain amount per share is paid out by the company and leaves the balance sheet. This should mean the company’s share price, and its market value, reduce by an equivalent amount, but that does not always seem to be the case. So how does this work?

Trevor


News editor Steven Frazer replies:

Your assumption is correct but there may be a multitude of other factors at play that exert an influence on a company’s share price on ex-dividend day, when anyone buying the stock is no longer eligible for that dividend.

Let’s imagine hypothetical electronics group Company X has 100m shares in issue and trading is at 100p per share. This gives it a market value of £100m. The company decides to pay a dividend to its shareholders of 2p per share, or £2m in total.

This means that on ex-dividend day, all else being equal, the share price falls to 98p and its market value drops to £98m. The decline in value is the market’s way of saying that the cash for the 2p per share dividend can no longer be counted in the company’s assets as it will soon be paid to shareholders.

However, there are various reasons why a share price could actually rise on ex-dividend day, rather than fall by the exact amount of cash earmarked to leave the company’s bank account.

For example, let’s say there are rumours that a major electronics manufacturer is about to release a new product which is expected to be a big hit with consumers. Investors speculate who might be supplying some of the components for this new product and bid up shares in Company X.

Another scenario might see positive economic data on the manufacturing sector which encourages investors to become more interested in stocks active in this area. That might encourage more buying in Company X shares.

There might also be a positive tailwind for equities across the board from government or central bank policy decisions.

Ultimately share prices are influenced by lots of factors.


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