In mid 2009, Paul Desroches, a France based investor, is considering investment in the shares of Paris headquartered Total SA (Euronext Paris: FP), one of the world’s largest integrated oil companies and a major chemical manufacturer. Total pays a cash dividend twice a year, so the amount of the semiannual cash dividend is significant: almost a 3 percent cash dividend yield per six month period, or 6 percent annually, based on current share prices. Desroches reasons that Total’s high dividend yield is particularly attractive in the 2009 context of low yields on short term investment grade bonds. Desroches decides to buy Total shares on the last possible trading day he can to receive an announced dividend. He explains to a colleague, “It would be like buying a bond on the last day of a six month period without having to pay the seller accrued interest yet receiving the interest for the entire six months.”
On 15 May 2009, Total reported that shareholders had adopted the board of directors’ resolution to pay a dividend of €1.14 per share in May 2009. The relevant dates are
|
Ex date |
Tuesday, 19 May |
|
Payment date |
Monday, 22 June |
Using only the above information and ignoring taxes and any tax effects, address the following:
1. Assuming all of Desroches’s assumptions are correct, what is the last date he could buy the stock and still receive the dividend?
2. If Total closed at €38.39 a share on the last day Desroches was entitled to the dividend, what is the likely opening price on the next day assuming all other factors are unchanged?
3. Critique Desroches’s statement.