Thursday is ex-dividends day in the London Stock Market, which on some days can have a noticeable impact on the FTSE 100.
Today, for instance, it has been calculated that FTSE 100 dividend payers “going ex-div” (we’ll explain what that means in a moment) have lopped almost 12 points off the value of the top-share index.
What is meant by “going ex-div”?
When a company announces a dividend payment in a results statement, the actual payment date of that dividend is some time in the future.
Partly this is because the board only has the power to propose a dividend payment; shareholders get to vote on whether to accept the proposal, so necessarily the dividend payment must be in the future.
So, what happens if a shareholder sells the shares before the payment is made?
That depends on whether they sell the shares before the “ex-dividend” date, which in London is set one day before the record date – the day on which the shareholder registry is checked to see who is entitled to receive the dividend.
Essentially, if you sell the shares before the ex-dividend date, you will not receive the most recently announced dividend. Likewise, if you buy the shares on or after the ex-dividend date, you will not receive the divi.
It follows, therefore, that if you buy the shares before the ex-dividend date, you will receive the most recently announced dividend, even though you did not hold the shares when the dividend was announced.
A-ha! I know what you are thinking … why not just buy a stock the day before it pays out a juicy dividend, trouser the divi and then sell the stock when it goes ex-div.
Surprisingly enough, the London Stock Exchange has been around for two centuries and people have got wise to that dodge.
What tends to happen is that if a share is paying a dividend of, say, 10p, then its share price will, all other things being equal, drop 10p on the day it goes ex-dividend.
That explains how clever people can work out things such as “almost 12 points was wiped off the value of the FTSE 100 today by index constituents going ex-dividend”.
An example might help
Let’s take Pearson PLC (LON:PSON) as an example, as that’s one of the Footsie stocks going ex-div today.
“The directors are proposing a final dividend of 34.0p per equity share, payable on 12 May 2017 to shareholders on the register at the close of business on 7 April 2017,” it revealed in its results statement on 24 February.
So, the divi was announced on 24 February.
The shares went ex-dividend today (6 April).
The record date is 7 April, which is when the share registrars will check to see who is entitled to the moolah (the gap between the ex-div date and the record date gives a bit of time for the records to be updated and for trades to be processed).
Finally, the money will actually be paid out on 12 May, which means £278mln or so of money earmarked for divis will have been sitting in Pearson’s account earning (not very much) interest for nigh on three months after the dividend payment was announced.
Timing the market
In theory, if a company is a big dividend payer, the shares should receive a little bit of a lift as the ex-dividend date approaches.
In practice, this is a barely noticeable phenomenon.
What is a noticeable phenomenon is logging on to a financial information web site and seeing one (or more) of your core holdings taking a bath – e.g. Pearson, down 8.6% this morning – for no readily explicable reason.
Chances are, there is a reason and that reason is the stock has gone ex-div.