How Does Cash Dividends Decrease Market Value?

All else being equal, if a company pays cash dividends then each shareholder’s wealth would consist of the dividend received and the market value of the shares owned, and this would be equivalent to the market value of the shares owned by each shareholder if the company had distributed profits by a share repurchase instead.

How could they be equal? I understand that Share Repurchase reduces the outstanding stocks thus increasing market value per share. However, I don’t understand why Cash Dividend reduces the company’s market value? Is it because dividends reduce RE? But in the real world, I do not usually see stock prices going down after a cash dividend…

For example, if the stock price is 50, and dividends are 5, why the shareholder’s wealth is still 50 and not 55?

I am pretty sure that Market Value per share=Stock Price per share (https://bizfluent.com/how-5854863-calculate-market-value-per-share.html)

It is called the ex-dividend date and the stock price does decrease by the dividend amount on this date. The individual stock prices could move based on other factors, but in aggregate the companies that pay out dividends will see a drop by that amount on their ex-dividend date.

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Oh wow, interesting… so in reality, if the stock price does not decrease by the dividend amount on the ex-dividend date, may I assume that the stock price has increased because of other factors?

And is it because dividends reduce retained earnings in the balance sheet causing a decrease in the market value? @chadsandstedt

Yes, that is a safe assumption.

No.

If you buy the stock on Tuesday, you get the $0.50/share dividend; if you buy the stock on Wednesday, you don’t. Would you be willing to pay the same price on Wednesday as you would on Tuesday?

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No, I would not. I see why the market value went down now. So may I also assume: Cash dividends reduce stockholder equity, but it is not the main reason why there is a decrease in the stock price after the ex-dividend date? @S2000magician Stock prices should somehow react to the reduction of equity

Thank you! @chadsandstedt

You’d think so.

Note, however, that equity declines on the declaration date, not on the ex-dividend date, nor on the payment date.

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Think of it from this angle -
A share is nothing but a derivative that derives its value from the assets and liabilities of the company -
Higher the assets of the company higher the value of the share, lower the asset of the company, lower the value of the share.

In a situation where dividend is paid the company’s asset reduces and accordingly the share shall derive a lower value.

Not necessarily.

It’s more a matter of how much cash flow those assets can generate, and how risky those cash flows are.

I did not mention it specifically, but what I meant above was the intrinsic value of the assets which shall be calculated based on the future cash flows and risk of those cash flows.
Higher such assets, higher the share value and vice versa.
Thanks for refining though :smile:

This is dividend displacement of earnings. As more and more cash is paid out companies have less money for reinvestment and growth.

Reading " Relationship among price multiples, present value models and fundamentals "

I hope this gives you some clarity.

Hypothetically, What if there was no growth possible at all for the company, and dividend payment was the only best option for the company. In such a case how do you back the reasoning you just gave?