Have you ever wondered why Thursdays can be bad days for the stock market? Today's decline (6 Apr) is partially down to macro events, currencies and response to US central banking policy remarks. However, there is another reason which keeps cropping up, as we now explain.
One factor is a particular quirk of Thursdays and it happens on a regular basis.
The penultimate trading day of the week is ex-dividend day in London, and that’s important because it suddenly strips out millions of pounds from the market.
WHAT IS EX-DIVIDEND?
This is when new investors are no longer eligible to receive the next dividend payment from a stock. By that, we mean the dividend that was declared in the last set of results.
The day of the week changed from Wednesdays to Thursday back in 2014 to reflect a faster share trading settlement process.
For example, betting firm Paddy Power Betfair (PPB) is among several large UK companies to go ex-dividend today.
‘The directors have proposed a final dividend of 113p per share which will be paid on 24 May 2017 to shareholders on the company's register of members at the close of business on the record date of 7 April 2017.
That’s what the company spelled out in its full year results announcement on 7 March, its effective ‘declaration date.’ This date, also known as the announcement date, is the date on which a company declares it will pay a dividend.
The ‘record date’ referred to above is the official date on which an investor must be a shareholder to qualify for the payment in question.
In other words, it’s when Paddy Power will have its corporate registrar go through the list of company shareholders and work out who is going to get paid.
FACTOR IN THE CASH GOING OUT
That the ex-dividend date is a day earlier, 6 April, allows time for this process to happen.
What’s important to note, and why the ex-dividend date can drag on the share price, is that it is at this point when the market factors the cash needed to pay the upcoming dividend from its company valuation number crunching.
Paddy Power on 3 April had 84,123,353 shares in issue, all due 113p each. That means a total cash payout of £95.06m.
The stock’s 1.9% share price fall to £84.25 on today (6 Apr) equates to a £137m decline in the value of Paddy Power, to just over £7bn. Which means just over two thirds of the day’s share price fall is directly responsible to the next payout going ex-dividend, about one third down to other factors.
Extrapolate this across multiple companies on any given Thursday and you'll see why ex-dividends act as quite a big drain on share prices and the overall stock market.
Other notable stocks going ex-dividend today include insurance group Aviva (AV.), engineer GKN (GKN), Hikma (HIK), the pharmaceuticals firm, bank Lloyds (LLOY) and fashion retailer Next (NXT), all FTSE 100 companies, plus several others.
