Simply Put: How dividend announcements affect stock prices

Jagat and Raj met at their favourite tea joint. This being the dividend payout season, a conversation on the topic ensued.

Jagat: Raj, I had bought some HPCL shares a week ago and the company has declared ₹ 14 final dividend apiece.

Raj: Nice Jagat. Looks like you would make a quick buck.

Jagat: Possibly, yes. Immediately after the dividend was declared, the stock price rose. But it fell this Monday. I am not able to understand why.

Raj: Interesting! Was the fall in stock price close to the dividend amount?

Jagat: Hmm. Roughly, yes.

Raj: Was Monday the ex-dividend date?

Jagat: Yes, according to the exchange notifications. But how does that matter?

Raj: Ex-dividend date is the cut-off for deciding which set of investors will get dividends. Those buying after the date will not get the dividend.

Jagat: So, only the ones buying the stock before the ex-dividend date are eligible for the dividend.

Raj:  To be eligible for dividend one must be a shareholder as per company’s records on the record date which is generally one day after ex-dividend date. If the investor is an owner of the shares on the record date, then she/he is eligible for receiving the dividend. Since SEBI follows a T+2 days system, one needs to buy the share at least three days before the record date.

Jagat: Okay. But, why does the share price fall on the ex-dividend date?

Raj: The price falls on the ex-dividend day, as a new investor now won’t get the dividend. Thus, it results in a decline of share prices, usually by an amount equal to the dividend value. However, you may not find things happening exactly like this way. Price fluctuations can be higher or lower than the dividend amount on the rising or falling side. Other factors such as market sentiments, macros, futures and options expiry, fundamentals and so on could also weigh on a stock. It may so happen that the stock does not react at all at the time of dividend investment.

Jagat: I am getting a hang of it. Can you elaborate?

Raj: Let us take your example. Hindustan Petroleum announced the final dividend on May 19, 2022, but the stock did not rise that day because of the fall in the broader indices. However, over the next couple of months, the stock price recovered. On August 22, 2022, the ex-dividend date, the stock opened around ₹ 16 lower than previous close of ₹ 248.80.  

Jagat: But the stock fell further that day…

Raj: As I said earlier, other market factors may have affected the price movements.

Jagat: This is quite interesting. So, should investors not worry about the price fall on the ex-dividend date?

Raj: Not exactly. The correction to the extent of the dividend is normal. But investors should carefully assess the fundamentals of the company. Any abnormal fall must be taken note of and the reasons should be ascertained.

Jagat: Sure Raj. That sounds good. Have a good day. Bye!

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