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Set out dividends, buybacks, reverse splits as well as ordinary stock splits, and the sequence of dates for a dividend

CFA® Level I · Equity Investments · Sources of Equity Returns · EQ.10.a

The idea

Companies return cash through dividends and share repurchases. A dividend passes through four dates: declaration, when the board announces it; the ex-dividend date, from which buyers no longer receive it and the price typically falls by about the dividend; the record date, when the register of holders is fixed; and payment. The ex-date falls before the record date, or on it where settlement takes one day; the gap depends on the settlement cycle and differs by market. Repurchases return cash to those who choose to sell, reduce shares outstanding and can raise earnings per share. Splits and stock dividends change the number of shares without changing the company's value, so the price adjusts in proportion; a reverse split cuts the share count, often to lift a low price above an exchange's minimum.

A practice question

From the question bank, with the reason each wrong option is wrong.

Which sequence of dividend dates is in the correct chronological order?

  1. Declaration, ex-dividend, record, payment — correct
  2. Declaration, record, payment, ex-dividendWhy not: The ex-dividend date must come before payment, since it decides who is entitled to be paid.
  3. Ex-dividend, declaration, record, paymentWhy not: The dividend must be declared before any ex-dividend date can be set.

The board declares the dividend, the shares then trade ex-dividend, the register is fixed on the record date and payment follows. The gap between ex-date and record date depends on the local settlement cycle.

A harder one

An investor buys shares on the ex-dividend date of a declared dividend. The investor:

  1. receives it, as payment comes laterWhy not: The payment date is irrelevant to entitlement. Buyers from the ex-dividend date onwards are not on the register in time.
  2. receives half of that dividendWhy not: Dividends are not split between buyer and seller. Entitlement is all or nothing, set by the ex-dividend date.
  3. will not receive that dividend — correct

The ex-dividend date is the first day a buyer is not entitled to the dividend, because the trade will not settle in time for the record date. The share price typically falls by about the dividend at the open.

The hardest tier

A company whose shares trade at 0.80 announces a 1-for-10 reverse split. The most likely motive is to:

  1. increase the total value of shareholdingsWhy not: A reverse split changes the share count and price in proportion; the total value of each holding is unchanged.
  2. return surplus cash to its shareholdersWhy not: No cash leaves the company in a split. Returning cash is done through dividends or repurchases.
  3. lift the price above an exchange minimum — correct

After the reverse split the price should be about 8.00. Companies do this to meet minimum price rules for continued listing and because some investors avoid very low-priced shares. It is sometimes read as a sign of weakness.

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