Is there any math involved here?

[robert Ihnot]

Now a matter I'd like to bring up is that XYZ-- I will let you guess the stock--declared a special dividend of $8/share awarded on the ex-dividend date at 9 a.m. Generally a dividend is small, like 50 cents or a $1.00 and the net result is that the price is automatically and immediately dropped by the amount of the dividend. However, it usually recovers fast, maybe even in one day. The payment date is about 3 weeks later, and I had some expectation that it (might) recover the $8 by that time.

As far as the mathematics of this $8 dividend, if it was even worth anything, nobody in the market seemed to find it important enough to even mention. It seems on the ex-dividend date, the stock dropped about $7.00, when I looked, and I immediately sold my shares.

Now the stock had a p/e of over 300 and as far as I have been able to tell in the following weeks, the P/e was so high on this over $100 stock,that it made no difference if it dropped $8.00 or not. I doubt buyers can tell the difference, and there has been, in the wake of the problems in Europe with the Euro, no real effort to recover the former price. Actually now the stock is below the price I sold it at.

I tried to think this out for some time. I never found anyone one to help, or even comment. The way dividends usually go, they quickly recover...but this did not work that way. I had some assumption that the stock price would rise as one reached the ex-dividend date, as people would want the $8/share. On the other hand, why not sell prior to the $8 drop, keep the $8 in my pocket, and then buy back at the reduced price?

I spent a lot of time thinking about this matter and never arrived at any conclusion. The press totally ignored the dividend. My broker had no suggestions. Furtheremore it muddles the accounting since the dividend is counted separately from the money lost on the stock sale.

Was there any math here worth thinking about? I have no idea, but I do know now what immediately happened, possessing now 20/20 hindsight.

 

[HallsofIvy]

Now a matter I'd like to bring up is that XYZ-- I will let you guess the stock--declared a special dividend of $8/share awarded on the ex-dividend date at 9 a.m. Generally a dividend is small, like 50 cents or a $1.00 and the net result is that the price is automatically and immediately dropped by the amount of the dividend. However, it usually recovers fast, maybe even in one day. The payment date is about 3 weeks later, and I had some expectation that it (might) recover the $8 by that time.

As far as the mathematics of this $8 dividend, if it was even worth anything, nobody in the market seemed to find it important enough to even mention. It seems on the ex-dividend date, the stock dropped about $7.00, when I looked, and I immediately sold my shares.

Now the stock had a p/e of over 300 and as far as I have been able to tell in the following weeks, the P/e was so high on this over $100 stock,that it made no difference if it dropped $8.00 or not. I doubt buyers can tell the difference, and there has been, in the wake of the problems in Europe with the Euro, no real effort to recover the former price. Actually now the stock is below the price I sold it at.

I tried to think this out for some time. I never found anyone one to help, or even comment. The way dividends usually go, they quickly recover...but this did not work that way. I had some assumption that the stock price would rise as one reached the ex-dividend date, as people would want the $8/share. On the other hand, why not sell prior to the $8 drop, keep the $8 in my pocket, and then buy back at the reduced price?

If you sell the stock before the $8 dividend, then buy it back, immediately after the dividend at the 'reduced price' you will have gained or lost nothing- you will have gained $8 on the sale of the stock but lost the $8 dividend. That's the reason for the drop in the price of the stock. As for it regaining that amount in the future, that depends on the market for that particular stock.

I spent a lot of time thinking about this matter and never arrived at any conclusion. The press totally ignored the dividend. My broker had no suggestions. Furtheremore it muddles the accounting since the dividend is counted separately from the money lost on the stock sale.

Was there any math here worth thinking about? I have no idea, but I do know now what immediately happened, possessing now 20/20 hindsight.