This one’s about stock price dips on dividend ex date. We’re told a stock value should fall approx. in line with the amount it pays out. But does it?

Hi this one’s about stock price dips on dividend ex date. We’re told a stock value should fall approx. in line with the amount it pays out. But does it? Someone must have done some number crunching to prove this? If not do you have some little Elves that can? Also would the expected dip be the gross franked amt or just the base value?

A: I can’t prove it, but I know from experience, it does. Here is why (take Fortescue as an example).

You can buy it today for around $20.50, and you will receive a dividend of $2.11. Net cost is $18.39. On Monday, when it trades ex-dividend, how much would you pay (all things being equal)? $20.50?? No. $18.39………possibly.

Clearly, overnight movements in overseas markets and commodity prices will influence the opening price……….as they do every day……….the opening price is not usually the same as the closing price the day before, but if you put these to one side, it will open at least $2.11 down.

In fact, it will be probably be a little more ………because franking plays a role. Not all shareholders can use franking credits (for example, overseas shareholders), but they will price the value in and make an adjustment for this.

One further point – professionals can arbitrage this (ensuring the movement is what I say it is).


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