Dividends vs. stock price
July 21, 2004 11:07 AM   Subscribe

So, Microsoft just announced that they're going to give a special dividend of $3 per share:

http://www.microsoft.com/msft/FAQ/faqdividend.mspx#Question7

Why has the stock price not risen by $3 on this news? It has risen somewhat since yesterday, but only about a dollar.

Doesn't this announcement mean that each share will be automatically worth $3 more, or have I missed something? It seems extremely unlikely that they'd announce something like this and then not do it.
posted by Caviar to Work & Money (17 answers total)
 
Thought the story read - on dividends to share holders.
posted by thomcatspike at 11:18 AM on July 21, 2004


It's a one time bonus of $3 per share.

The stock price did go up, but not $3 a share. Why would I pay $3 per share more? So I could make no money?

Also, a share is a little tiny chunk of a company. The fact that the company is going to give me $3 does not make that little chunk enherently more valuable (in fact it probably makes it less valuable, since they just spent a bunch of money giving everyone $3).
posted by falconred at 11:24 AM on July 21, 2004


conditioned upon shareholder approval of amendments to the company's employee stock plans at the annual shareholders meeting currently planned for November 9, 2004. The stock plan amendments would permit adjustments to outstanding employee stock options and stock awards as a result of the special dividend.

Not being an employ here sucks especially when you add the ESPP. Which may offer a discount of 15% off the market price which also is bought at the lowest market price of either the opening or closing date of the purchase plan.
posted by thomcatspike at 11:26 AM on July 21, 2004


in fact it probably makes it less valuable, since they just spent a bunch of money giving everyone $3
If shares are sold it can make the shares go up. Especially when a lot of stock options have been given out in a company.
posted by thomcatspike at 11:36 AM on July 21, 2004


can make the shares go up.
Over time adding if the company buys them back.
posted by thomcatspike at 11:41 AM on July 21, 2004


Couple of points:

1) First of all, the larger effects of a dividend--like stock concentration/dilution, less cash-on-hand--has already been factored in to the market value of the shares by anyone who understand them enough to do that. As always, the vast majority of shares on the market aren't held by retail investors, but by large funds and banks, who have been pressuring MS to do this for a long time. Those institutional investors also have a general expectation that eventually a company the size of MS, sitting on all that cash, is going to pay some of it out, and they've been anticipating it for a while.

2) More importantly, the dividend doesn't impact the long-term value of the shares because it's not tied to them. Once it's paid out, it's moot to any future buyers.
Put it this way--let's say you owned 100 shares of MS, and you got a $300 dividend. If you sold me those shares later--the next day, a week later, a year later--would you pass along the $300? If not, then why should I pay you any more for the shares? I might pay a bit more based on the potential that they might pay out again, but the current dividend doesn't really factor into _my_ long-term pricing.
posted by LairBob at 11:55 AM on July 21, 2004


Thomcatspike, I am not sure I am reading you correctly, but the employee stock discount has been cut back to 10% and only on the closing day of the price.
posted by GaelFC at 11:59 AM on July 21, 2004


And trharlan, while I think you're right in principle on who "owns" the $3, the fact remains that it wasn't really liquid for any given shareholder until MS management decided to release it, so that blurs things a bit. Having legal "title" to a company's cash isn't the same thing as having it in your pocket, and I don't think analysts value them both exactly the same.

In addition, while the overall valuation might suffer because of the loss of cash after the payout, there are so many other things that go into a valuation that you can't reliably predict that the value's going to drop by exactly $3. What if there's a major product announcement right before or after the payout, or some kind of news on the EU trial? There are lots of factors that could mitigate or even swamp the effect of losing a little bit of cash--especially when everyone now knows that the cash is going to be gone, and is already factoring that in.
posted by LairBob at 11:59 AM on July 21, 2004


(Or more precisely, in that two-day "ex-dividend" window--I'm not saying that the dividend payout won't depress the valuation, but just that for a company like MS, it's going to be one factor among many driving the share price.)
posted by LairBob at 12:02 PM on July 21, 2004


The share didn't go up by $3 a share because the share owners owned that money already. What happened is that company just decided to return some of the money to the shareholders instead having it sit on the company's bank account.

In fact after the money has been passed to the shareholders the stock price should come down by that $3 per share. Naturally there are lot of other things going on so you won't really see that so clearly.

If MS had come across pot of gold that it didn't own before and that pot of gold was worth $3 then the stock price should have gone up by the exact amount.
posted by zeikka at 12:09 PM on July 21, 2004


Not being an employ here sucks especially when you add the ESPP.

Except when you take into account that MSFT traded at $133 at the 1999 forward split and has since split back. Given that MSFT is trading at $29 today, the 15% ESPP discount wouldn't have prevented you from losing money.

As always, the vast majority of shares on the market aren't held by retail investors

According to the Wall Street Journal, 30% of MSFT shares are held by individuals. The remaining 70% are heald by Bill, Steve, and the institutions (mutual funds which, eventually, are held by individuals).

The stock will drop by roughly $3 when the stock trades ex-dividend

This is the expected theoretical behavior. The large mass of cash may be acting like a volatility damper. After that mass is reduced, MSFT may see greater volatility in its price swings.

The real news is that $9 Billion dollars will be dumped into consumer's hands right before xmas. Get your tickle-me-elmo dolls and beanie babies now!
posted by Kwantsar at 12:16 PM on July 21, 2004


According to the Wall Street Journal, 30% of MSFT shares are held by individuals. The remaining 70% are heald by Bill, Steve, and the institutions (mutual funds which, eventually, are held by individuals)

Granted, but I was making that point to indicate that most of the stock is held by "well-informed" shareholders, who have already anticipated the dividend issue for a while, and now that it's been announced, are surely factoring it in much more precisely.

To that end, what portion of that 30% are current or former MS employees (and therefore pretty well-informed on the dividend issue)? Any given employee stakeholder may not be a financial whiz, but they're smart folks who have been managing their MS stakes for a while, and are getting advice from financial pros--in aggregate, they're going to behave pretty intelligently.

Similarly, sure, some of the institutions are mutual funds (and some of them are pension funds, which are also, in the end, held by individuals), but all those institutional shareholders are managed by a small, centralized group of financial professionals. The retail mutual fund investor decides which funds to invest in, but not the daily share buying/selling for those funds--that's done by the managers and consultants. (99.999% of the time.)

In sum, then, all I'm trying to say is that probably 75% or more of MS shares are held by people who have anticipated the dividend, and are factoring in its probable effects (like increased volatility) already. As a result, all those resulting effects are going to be much more gradual over time, and not a set of precise $3 jumps up or down.
posted by LairBob at 12:43 PM on July 21, 2004


As mentioned above, once the $3/share is distributed, the company will be worth $3/share less. So you might be able to 'buy' the dividend, but at the cost of a slightly less valuable stock.
posted by eas98 at 2:28 PM on July 21, 2004


Isn't the dividend also a one-time thing? There's no guarantee it will ever recur, so next year, unless the stock has appreciated, it's worth the same amount, without the $3 bonus. The small jump in price is justified given the short-term gain, but there's no guaranteed long-term value in a dividend.
posted by scarabic at 11:12 PM on July 21, 2004


So I understand why the investors would want to receive a dividend, but was has Microsoft actually gained from all this?
posted by reklaw at 4:10 AM on July 22, 2004


Well, there are all sorts of potential secondary effects, some good, some bad (like the possibility of increased volatility that Kwantsar pointed out), but the main motive for MS is really just to generate goodwill among its existing and future shareholders. The folks who have said that technically, the shareholders already own the $3 are right, and by hoarding a huge pile of cash--more than most people think they could ever reasonably need for business reasons--the management was irritating a lot of the important institutional investors that they couldn't really afford to piss off.

Someone who runs a mutual fund or a pension fund looks at their "share" of all the MS cash, and thinks "It's not doing me much good there--you're only earning a nominal interest on it, and you don't need it all for working capital to keep the company safe. Give me some of it, so I can invest it the way I want to."
posted by LairBob at 6:33 AM on July 22, 2004


has been cut back to 10% and only on the closing day of the price.
Wow my company has a better plan. Should have made it clearer that I was guessing, which may offer.
posted by thomcatspike at 2:26 PM on July 22, 2004


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