Pricing adjustments on Ex Dividend Day

[Ncc1701]

Hello All,

Does anyone know why some quote providers and some brokerage firms adjust the price of a security or the position value day change to reflect the fact that a security is trading without the dividend (aka..it is the Ex Dividend Day) ?

I can't seem to understand the rationale for this, to me it just confuses people. Thanks for any insight.

 

[PaunchyPirate]

If I understand your question correctly... when a dividend is paid out to shareholders that decreases the overall value of that fund by an equal amount. The money is no longer in the fund. But the number of shares in the fund remains unchanged. So the price/value per share is always going to be less.

However, this usually happens on a day when the market is up or down. So in addition to having its value reduced on that day, the fund may also lose more value on that day due to market conditions. Or it may make money that day, reducing the loss in value from dividend distributions. Or if a very good day, the dividend-related reduction might actually not be noticed if the market increase exceeded the distribution.

Is this what you are asking about?

 

[OldShooter]

Consider a firm with $100 in one-dollar bills and no other assets. Before it pays a $1 dividend the firm is worth $100. After, $99.

To be technical, on the ex-dividend day it has created a $1 liability and its value is thus reduced by that liability. On the dividend payment date, it takes $1 from the safe and pays off the liability, a transaction that does not affect the firm's net value.

 

[njhowie]

Consider a firm with $100 in one-dollar bills and no other assets. Before it pays a $1 dividend the firm is worth $100. After, $99.

To be technical, on the ex-dividend day it has created a $1 liability and its value is thus reduced by that liability. On the dividend payment date, it takes $1 from the safe and pays off the liability, a transaction that does not affect the firm's net value.

That's the theory.

In practice, there is a difference between "worth" and "share price". There really is no necessity or good reason for the exchanges to adjust the share price lower on ex-dividend date. The shares will adjust where investors want it to be on the ex-dividend date - which could be up or down, whether the exchange adjusted the price or not.

 

[OldShooter]

... There really is no necessity or good reason for the exchanges to adjust the share price lower on ex-dividend date. The shares will adjust where investors want it to be on the ex-dividend date - which could be up or down, whether the exchange adjusted the price or not.

Err ... AFIK exchanges never have anything to do with setting prices. An exchange has sellers with offering prices and buyers with bid prices. Bid prices go down ex-dividend because of "the theory." From there, market action takes over, often masking the reduction and sometimes causing naïfs to think that the dividend is somehow free money.

 

[Ncc1701]

If I understand your question correctly... when a dividend is paid out to shareholders that decreases the overall value of that fund by an equal amount. The money is no longer in the fund. But the number of shares in the fund remains unchanged. So the price/value per share is always going to be less.............Is this what you are asking about?

Yes it is. I gotta give props to Old Shooter, his explanation helped me understand it a lot better now. However to those ill informed and don't realize their investment is trading Ex Dividend, they think it has dropped for some other reason and cant understand why unless they research further.

What makes matters worse is that some brokers will quote the price of the security reflecting the fact that it is trading ex dividend when in fact that is not the last traded price.

In order to prevent confusion, they really should make the ex div date and the payable date the same. That way one will see the price depreciation but simultaneously will see the offset in the form of cash or reinvested shares.

 

[sengsational]

I'm no trading expert, but I don't think I've seen the phenomenon mentioned where "some brokers...quote...not the last traded price". I often see the sawtooth pattern (big drop after ex-dividend day), as expected, but never have seen "quotes" that add-back the dividend. How would a brokerage house undo that strange adjustment to a quote? If I were on the path to buy the stock, when would they let me in on the secret that the quote they're showing isn't a price I can buy the stock for?

 

[chassis]

The distribution, either capital gain or dividend, is cash that has left the investment. It's like you giving $100 to your neighbor, you are now $100 poorer. But then you earn money and grow your net worth to more than make up for giving your neighbor $100.

One of my long term, held for 25 years, high growth funds dropped nearly 10% today, because it distributed a capital gain.

Another of my high growth funds, held for less than a year, dropped slightly in value when it issued a 3% distribution.

 

[njhowie]

Err ... AFIK exchanges never have anything to do with setting prices. An exchange has sellers with offering prices and buyers with bid prices. Bid prices go down ex-dividend because of "the theory." From there, market action takes over, often masking the reduction and sometimes causing naïfs to think that the dividend is somehow free money.

https://finance.zacks.com/stock-price-change-dividend-paid-3571.html

Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend.

"Stock market specialists" is the exchange, not brokers and quote services.

 

[njhowie]

One of my long term, held for 25 years, high growth funds dropped nearly 10% today, because it distributed a capital gain.

Another of my high growth funds, held for less than a year, dropped slightly in value when it issued a 3% distribution.

Completely depends on how large the distribution is, netted against the ex-dividend day's NAV movement (post distribution reduction).

 

[jim584672]

Mutual funds that calculate based on NAV are reduced because the dividend reduced the value of the fund. Stock prices however are not "set", they are decided by buyer and seller. Open limit orders are reduced by the dividend unless marked DNR (do not reduce). It isn't an iron clad rule that a stock MUST trade lower by the dividend, but it generally does.

The day change amount ex dividend depends on the vendor if they add back the dividend or not to the change amount.

 

[chassis]

Completely depends on how large the distribution is, netted against the ex-dividend day's NAV movement (post distribution reduction).

@njhowie Yes. Consistent with the post you quoted, the fund's NAV I mentioned dropped exactly in the percentage of the capital gain distribution. This was posted on the fund's summary page today.

 

[Dd852]

When I used to train stock market reporters this was a concept that always, always caught people out if they had no trading experience before. The iron rule you had to drill into people was to always check if a stock were trading ex-div before writing an excited story about a price drop! And still people got caught out sometimes...

The issue is people - and this isn’t meant as a personal criticism at all - too often confuse the stock price with an absolute objective score card. It isn’t. As several good and clear comments above explain the price is simply a reflection of market sentiment, which combines values, judgment, hopes, wishful thinking, guesses, overall conditions, and politics with the “realities” of the balance sheet (which as we all know post Enron etc can also be works of art, fiction and confusion) and projections for future cash flows. So never get hung up on daily movements, would be my advice. Trends, big moves vs peers, news that clarifies rather than obscures - these are the things to trade on (if you trade at all, which is another subject!), but never the price dynamics in the short term.