“Ex” Marks the Day
The board of directors of Divided Airlines has declared a dividend of $2.50 per share payable on Tuesday, May 30, to shareholders of record as of Tuesday, May 9. Cal Icon buys 100 shares of Divided on Tuesday, May 2, for $150 per share. What is the ex date? Describe the events that will occur with regard to the cash dividend and the stock price. The ex date is two business days before the date of record, Tuesday, May 9, so the stock will go ex on Friday, May 5. Cal buys the stock on Tuesday, May 2, so Cal purchases the stock cum dividend. In other words, Cal will get $2.50 ×100 =$250 in dividends. The check will be mailed on Tuesday, May 30. Just before the stock does go ex on Friday, its value will drop overnight by about $2.50 per share.
As a more concrete example, in the first quarter of 2001, McGraw Hill, which we feel compelled to note is a very fine company,1 boosted its dividend by 4.3 percent. In fact, dividends have been paid by the company since 1937 and have increased without fail since 1974, growing at a compound rate of 10.9 percent over the following 27 year period. The dividend record date was February 26, with payment to be made on March 12. The new quarterly dividend was $.245 a share. The record date was February 26, a Monday, so the ex date was Thursday, the 22nd.
When the market opened, McGraw Hill’s stock price dropped by $0.11, or only about half of the dividend. However, the market was very active that day, so the dividend wasn’t the only influence on the price. On May 24, the ex date of McGraw Hill’s next dividend, the stock dropped by $0.25 at the opening, exactly the amount of the dividend.
CONCEPT QUESTIONS
a What are the different types of cash dividends?
b What are the mechanics of the cash dividend payment?
c How should the price of a stock change when it goes ex dividend?