- It has been suggested that dividends permanently reduce share price in a relative sense.
- It has also been suggested that dividends only have a temporary effect on share price that disappears after a few days.
- A case study was conducted to investigate the 5-day price change of Cheung Kong Holdings after 15 ex-dates.
- Preliminary statistical analysis suggested that the share price of CK did not recover to the level it was before the dividend was paid.
In the dividend debates, the outspoken research advisor Larry Swedroe has suggested that dividends permanently reduce the share price (in a relative sense). He writes:
There are many investors who have a hard time accepting the fact that when a company pays a dividend the payment results in a permanent relatively lower price (relative to what the price would have been the dividend had not been paid), not just a lower price on the day it makes the distribution.
At the other end of the spectrum, the well-respected creator of F.A.S.T graphs Chuck Carnevale holds the opposite view, suggesting that the ex-date reduction is only temporary:
As you review the ex-dividend graphs, notice how sometimes the stock price rises almost immediately after the ex-dividend date, and sometimes it falls. In other words, post ex-dividend date pricing is more random, than affected by the ex-dividend date.
Top SA author David van Knapp concurs (as was quoted in the article linked above).
Because of this price adjustment, shareholders who owned the stock before the ex-dividend date, and who hold on straight through, see the price of their stock momentarily lowered by the amount of the dividend. In practice, as soon as trading opens on the ex-dividend date, market participants establish the actual price of the stock. The exchange's price adjustment is usually hard to detect after an hour or two of trading. There certainly is no long-term impairment to the price of the stock.
This issue has stirred passionate debate amongst those who focus primarily on dividend growth investing, particularly those who employ an income-based approach, and those who prefer a total return strategy (it should be noted at this point that DGI and total return are not mutually exclusive, but many investors tend to associate themselves with one camp or another).
As a newer investor, I decidedly do not have the financial credentials of Mr. Swedroe nor Mr. Carnevale, nor the illustrious investing experience of Mr. Van Knapp. However, my background in science encourages me to approach matters from a logical perspective, while leaving emotion aside (as much as possible). So when one commenter offered this suggestion, I was piqued.
OK, look up the exdividend dates for JNJ, XOM and CVX and chart their stock prices on exdividend date and for the next 5 days afterward. Tells us if the price stays down or if it comes back up. Balls in your court bud.
Seeing is believing.
Therefore, I set out to investigate the hypothesis: does Cheung Kong Holding's (0001.HK) (OTCPK:CHEUY) share price recover 5 days after the ex-date dividend date? Answering this question could possibly help us reconcile the disparate views between the two camps, and shed light on the distinction between "permanently" and "temporarily."
Cheung Kong Holdings
Cheung Kong (Holdings) Limited, or CK, is the flagship of the Cheung Kong Group, headquartered in Hong Kong, and one of Hong Kong's leading multinational conglomerates. The conglomerate includes 9 companies in Hong Kong alone, the largest of which is Hutchinson Whampoa. The chairman of the company is Li Ka-Shing, Asia's richest person. As of April 30th, 2014, the total market capitalisation of the group was HKD $1,054 billion (ca. USD $ 136 billion, in league with Citigroup (NYSE:C), McDonald's (NYSE:MCD) or Philip Morris (NYSE:PM), and good for fourth-highest market cap in Hong Kong's Hang Seng Index (tied with Tencent Holdings). Recently, CK has been actively expanding its operations into Europe while divesting itself of its Hong Kong and China assets:
For 2013, Hutchison recorded operating profit of HK$24.00 billion from operations in Europe, accounting for 37% of total profits. That exceeds the 35% share of operating profits from Hong Kong and Chinese operations combined. By comparison, Europe businesses accounted for just 12% of the company's operating profits in 2008, while Hong Kong and China accounted for 45%.
Hutchison and its parent company, Cheung Kong Holdings Ltd., have expanded in recent years into a roster of utility and telecom companies in Europe which are generating steady cash-flow streams. Deals by Mr. Li's companies in recent years include a US$1.7 billion takeover of Orange Austria in 2012 and the purchase of U.K.'s Northumbrian Water Group for US$4 billion in 2011.
The expansion of Hutchison and Cheung Kong in Europe has come while Mr. Li has been disposing of some of his Hong Kong assets. Mr. Li in January raised US$3.11 billion from listing his Hong Kong electricity operations.
Like most Hong Kong-listed companies, Cheung Kong does not pay quarterly dividends. Instead, its dividends are paid bi-annually, with a "large dividend" paid in May and a "small dividend" paid in September. With a large dividend of HKD $2.90 paid in May 2014 and a small dividend of HKD $0.58 paid in September 2013, CK currently yields about 2.5% (trailing) at the time of writing with a payout ratio of 23%. CK is also currently sporting a P/E ratio of 9.18 and a P/B ratio of 0.90.
While CK's share price suffered greatly (>50% price decreases) during the aftermath of both the dotcom crash and the financial crisis, it has maintained or increased its dividend every year over the past 15 years. However, its 15-year compound dividend growth rate is 7%, which may be deemed to be low by most DG investors. The graph below shows the amount of the "large dividend" paid out by CK over the past 15 years.
The reason for choosing CK over US companies for this exercise is due to the semi-annual nature of its dividend policy, in particular the payout of a single "large dividend" a year, which should allow the effect of the dividend ex-date reduction on the share price and its subsequent recovery easier to assess.
- The 5-day % price change was chosen as the benchmark as this was deemed to give sufficient time for the share price to "recover," but short enough that any stock-specific news would not have a large effect. Percentage change (rather than price change) was used as this was thought to allow for a fairer comparison between changes at different times.
- Data was collected from Yahoo Finance historical prices. The share price of CK before the ex-date was recorded, as well as the share price five trading days later. For example, if the ex-date occurred on a Monday, then the previous day's close price was recorded (i.e. last Friday's), as well as the close price on the Friday of the week of the ex-date.
- This was done for 15 CK "large dividend" ex-dates, spanning 15 years. For comparison, the 5-day % price change for the benchmark index, the Hang Seng Index (^HSI) (NYSEARCA:EWH), was also recorded for the same time period (i.e. the time period covering CK's ex-date).
Results and analysis
The first table shows a simple count of the number of times (out of 15) that the share price of CK was able to recover fully to the level at which it was at before the dividend was paid after 5 days.
|Yes (%)||2 (13%)||7 (47%)|
|No (%)||13 (87%)||8 (53%)|
The data shows that CK was not able to recover its pre ex-date price 87% of the time over the past 15 ex-dates. On the other hand, the benchmark index showed no great bias to the upside or downside in the period surrounding CK's ex-date, as would be expected from the random nature of stock price changes on a short time scale. To test whether this is statistically significant, either the binomial test or the chi-squared test can be performed. For either test, the null hypothesis was that a 1:1 ratio of "yes" and "no" counts should be expected.
The p-value tells us, in layman's terms, the likelihood that the observed data are due to chance. The p-values calculated for CK are very low, below the standard threshold for significance (0.05). Simply put, this means that we are >95% certain (>99% in this case) that there is a significant deviation between the observed ratio (87% recovery) and the expected ratio (50% recovery). In other words, there is an inherent bias to the downside for the 5-day % price change of CK after the ex-date that cannot be explained solely by chance.
The next table shows data for the 5-day % price change for CK for its past 15 "large dividend" ex-dates. The % change was calculated with the share price of CK on the day before the ex-date as the denominator.
|5-day % price change||CK||HSI|
The results show that the 5-day % price change of CK after the dividend was paid out was around negative 3%, which is on the order of the historical yield of its "large dividend." Given that the benchmark index declined by an average of only -0.6% during the same time interval, the large drop in CK is unlikely to be attributable to movements of the largest stock market as a whole.
Due to the idiosyncratic fluctuations of individual stocks, the standard deviation of 5-day % price changes for CK was rather high (4.55%). Therefore, a t-test was conducted to investigate whether the decrease of -3.14% was statistically significant compared to the expected value of 0% (assuming that share prices are random over the short term).
Again, with the p-value below 0.05, the 5-day % price change decline in CK (-3.1%) can be considered to be significantly different to 0%. On the other hand, there was no significant difference between the -0.6% decline of HSI over the same period and 0%.
Discussion and evaluation
This analysis was performed solely to answer the research question: does CK's share price recover 5 days after the ex-dividend date? The results of this study suggest that the answer is no. Therefore, I conclude that the ex-date dividend reduction is not nullified by market fluctuations over the course of a 5-day time span.
One may be able to rationalise this outcome by considering the infamous "dividend capture" strategy, whereby one buys a stock before the ex-date and then sells a few days after, pocketing the dividend and presumably selling the stock for roughly the same price as before (if stocks indeed did have the ability to recover after the ex-date). This study provides further evidence that this strategy is unlikely to work, as CK's share price was not able to recover in 5 days after the ex-date. On an intuitive level, this makes sense because why would someone pay the same price for a stock a few days after the ex-date if you weren't entitled to receiving the cash?
However, is this reduction "permanent" (in the relative sense, at least)? In the absence of a wormhole that allows us to peer into an alternate universe where CK has never paid a dividend, I cannot say definitively. Hence, this study does not answer the questions:
- How many days would it take for CK's share price to recover?
- Would CK have done better if it had not paid a dividend at all?
- What would the current share price of CK be if it had never paid a dividend these past 15 years?
Wiser heads may have the answer.
As this is my first article, any and all constructive criticisms are welcome. The next article in this series will look at the 5-day price change behavior of Exxon Mobil, a beloved stock of DG and non-DG investors alike. This analysis might be more tricky because the quarterly nature of the dividends means that less than 1% of the share price is being paid out on each ex-date. I am open to suggestions on how to better conduct the analyses, as well as advice how to process the data more efficiently (I am currently manually copying the share prices from Yahoo Finance historical prices on the chosen dates).
Raw data for the calculations can be found in the excel screenshot below.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.