[tomp]

> Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it.

You're wrong. When the company issues the dividend, the share price falls for precisely the amount issued. So if everybody used that money to buy the shares again, the share price should return (roughly) to the value before the dividend was paid. The number of shares outstanding wouldn't change.

[JDDunn9]

You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.

[cowsandmilk]

No, you are missing the point.

There is a value in a future dividend. On the ex-dividend date, the share becomes less valuable because the new holder will not receive a dividend in X days. This X is usually very small, so a share that goes from paying you $5 in two weeks to not paying you has clearly lost value close to $5.

[JDDunn9]

The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.

If your argument was true, that a stock's price predictably fell the day after the dividend, investors could simply short the stock and get a guaranteed profit, which is not possible in an efficient market.

[phyalow]

> The timing of dividend payments is irrelevant.

False. If I receive cash today I can reinvest it and start earning a return. If I receive cash in a month I have forgone one months reinvestment return.

> investors could simply short the stock and get a guaranteed profit, which is not possible in an efficient market.

False. Well if you are short a stock over ex dividend date then you need to pay the owner of the stock (whomever you borrowed from) 1) the dividend which he has forgone 2) a financing spread equal to a benchmark (e.g. FED Funds + 300 bp's) for the duration you are short.

No offense but you really haven't thought this through very hard.

Also markets are not efficient despite what you read in academia.

[JDDunn9]

The net present value takes into account the difference between payment today and payment tomorrow.

The ex-dividend rate is an implementation flaw that makes the stock price discontinuous at the dividend date. If dividends were pro-rata it would not be.

I never said markets were perfectly efficient.

You didn't think through your answer very hard did you? ;)

[phyalow]

I think we are going to continue disagreeing. You seem to enjoy Finance so I would encourage you to learn more about it for your own benefit.

[tomp]

> that a stock's price predictably fell the day after the dividend,

They do. But you don't usually see this, because the prices are "adjusted", to make price history continuous, same as with stock splits.

Take a look at MSFT (Microsoft) stock price on Yahoo! Finance. "Close" is what actually happened, and "Adj Close" is what you see on the graph.

  Date	          close      Adj Close*
  16 Feb 2016     51.09	     51.09
  16 Feb 2016                             0.36 Dividend
  12 Feb 2016     50.50      50.14

  * Close price adjusted for dividends and splits.

https://uk.finance.yahoo.com/q/hp?s=MSFT

> investors could simply short the stock and get a guaranteed profit

No, to short a stock you need to borrow it first. If you borrow a stock, you owe the dividends that were due in the meantime.

[JDDunn9]

The adjusted price reference you made is axiomatic. Adjusted prices simply subtract the dividend. It does not reflect market value. You'll notice the open on the day after the dividend, the stock actually went up $0.40 from the closing price.

When shorting, you only pass the dividends through. The company sends you the dividend, you send it to the original owner, you could still profit from the drop in share price.

[tomp]

Well, the stock price might have changed because of some news or general market sentiment. I guess I could have found a better example, a stock where the dividend is much bigger (percentage-wise), the effect would be much clearer then.

Edit: e.g. EWM (an ETF, I think)

https://uk.finance.yahoo.com/q/hp?s=EWM&d=3&e=4&f=2016&g=d&a...

No, shorting doesn't work that way, obviously. "Shorting" means you sell he stock, so the new owner gets the dividend, not you. That's one reason shorting equities is very risky long-term.

[tomp]

No, it happens just before the dividends.

Say you own 1 share. It's trading for $20. Tomorrow the company pays $2 dividend. Then your share is worth $18 and you have $2 cash as well.

Alternatively, if you're buying the share, you're willing to pay $20 for it today but only $18 tomorrow, because you know that you won't be getting a $2 dividend if you buy it.

If you take future dividend payments into account, you also need to discount them. If you think that (discounted future dividends) > (stock price), that's a signal for you to buy. If enough investors reason this way, the price will rise until (discounted future dividends) ~~ (stock price).

[JDDunn9]

The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.

[mcgoo]

The future earnings have huge uncertainty to them. A company with a $50 stock price might have $5 per share worth of cash in the bank, (which is something you can actually observe.) The other $45 represents expected future earnings. If the stock pays out a 50c dividend, the stock now has $4.50 per share in the bank and the $45 expected future value is unchanged.

[tomp]

Either you're stupid, or there's a misunderstanding. Probably the latter. Let me try again. Assume that δ is the discount factor (δ = 1 / (1 + r)), P is price, and D_i is the dividend in year i.

Before dividend:

  P = D_0 + δ D_1 + δ^2 D_2 + δ^3 D_3 + ...

After dividend:

  P = δ D_1 + δ^2 D_2 + δ^3 D_3 + ...

[JDDunn9]

When calculating the value of an annuity, all that matters is your number of periods, the amount, and your discount rate. This is why an annuity appreciation chart over time is continuous.

[harperlee]

This comment would be better without the gratuitous namecalling.

[tomp]

Sorry, I get very (too) emotional when someone is wrong with math...

[phamilton]

Profits being flat isn't quite right. Profits being zero is the case where a company issuing a dividend would eventually become worthless.

[JDDunn9]

This is a strawman argument. Cash is not required to be re-invested to maintain current profitability.

[phamilton]

That's not the argument I'm making. I'm not disagreeing with you.

The point I'm making, which I admit is an obvious one, is that without profits a dividend will erode a company's value. Simple flow of money. Unless there's a surplus flow of money in, you can't have an outward flow. Therefore, the effect of a dividend on a company's market cap depends on how much profit they have in comparison.