Dividends

[PaulJohann]

There are some very useful posts in this forum about the effects of dividends but I'm not sure if they provide an answer for my question.

I understand that dividends have
1) a more direct effect on PNV (for all investors) and since it is company money a negative effect on CBV,
2) a more indirect effect on salary changes and in attracting other investors.
The question I have is
3) is there a direct effect of dividends on the going share price?

Thanks for your help
Paul

[Hawk]

Have you read Appendix 7 - sec. 3.4 in Oil Can's Handbook yet?
That might help explain it some.

[PaulJohann]

Hawk,

it was the explanation given there

.... Dividends slowly nudge up the share price of a company.

that caused my question.

[Hawk]

Ah! Well, never mind.
Someone else will have to help out then as the stock market is my weakest point in RT3.

[Wolverine@MSU]

Actually, dividends can have a BIG influence on stock price. I was always in the habit of decresing dividends to "0" at the start of the game. This was good for the company, but I began to notice that during Prosperity and Boom times, when my company profit was really big, my stock prices would take a nosedive in the Dec. -> Jan. transition. That was good for me, in the sense that I could sell off some shares in Dec. and Buy them back at a lower price in Jan. I found that by stopping the game near the end of Dec. and increasing the divident to the maximum it would let me would raise the stock price in the year turnover, or at least lessen the decrease during Recession and Depression. The only thing I forget to do most of the time is return the dividend to "0" at the beginning of the next year. Dividends seem to have a smaller effect on stock prices during the year; their biggest impact is in the new year turnover.

[OilCan]

The stock price - dividend information came from a post by Lama. I could not find it on this forum, so it must have come from another forum. Here it is verbatim from Lama:
----------------------------------------------------------
With the following evidence I will prove high dividend payments increase the share price.

Player Interest Payments:
I started a map where the player had -$1,000,000 at the beginning, owned no stock, and chaired no company (hence, no dividends and no chairman’s salary received).
Interest on the debt was deducted monthly. The month-to-month interest rate (for example, from March 31st to April 1st) was always constant in any given economic state.
In ‘depression,’ the amount deducted over the end of the month was always 0.75% of the total, compounding to 8.6% for one year.
In ‘normal,’ monthly interest was 0.58%, annual 6.6%.
In ‘boom,’ monthly interest was 0.42%, annual 4.7%.

Player Dividend Receipts:
Same map. The player started a company with $1,000,000 (100% ownership), set the dividend to 3.12$/share @ 20,000 shares outstanding. This should total a sum of $62,400 per year. At this point, I went into the editor and checked the condition “Cannot change dividend,” so that the AI would not mess with it. Then the player resigned, to avoid the chairman’s salary.

By event, I reset the player’s cash to zero at the end of February, May, August, and November, so that I would get an exact reading of the dividend received at the start of each following month.

Player cash at the beginning of March, June, September, and December, respectively, was always exactly $15,663. This comes to a total of $62,652 for the year – close enough to the expected amount of $62,400.

Influence of Dividend on Stock Value
Same map. Economic state was kept at normal. The player started a company with $1,000,000 (100% ownership). By event, the company received $100,000 monthly. Other expenses remained constant across trials ($6K for overhead, $9K for salary), while other income varied between $41K and $42K for interest on positive cash balance, as cash flow was influenced by dividend payment.

Dividend payment was varied in four trials:
I.) 0.00$/share = $0.0 p.a. total
II.) 0.50$/share = $10,000 p.a. total
III.) 2.05$/share = $41,000 p.a. total
IV.) 3.12$/share = $62,400 p.a. total.

At the start of the year, the book value per share (bv/s) and the share price (price) were identical, @ $50.
There was no stock trading. Over the year, bv/s climbed constantly, reflecting the positive cash flow. Price likewise climbed to Dec. 1st, then was adjusted down on Jan 1st.
These were the values in $ for each trial (keep in mind that all values were 50 at the beginning):
I.) Dec 1st: bv/s 106, price 84; Jan 1st: bv/s 111, price 66
II.) Dec 1st: bv/s 105, price 84; Jan 1st: bv/s 111, price 67
III.) Dec 1st: bv/s 104, price 83; Jan 1st: bv/s 109, price 68
IV.) Dec 1st: bv/s 103, price 82; Jan 1st: bv/s 108, price 69

Consider, first, the declining book value per share across samples on both dates, respectively. This decline reflects the higher negative cash-flow with increasing dividend. In other words: After a year of paying higher dividends, the company’s book value is lower, because it has less money.

Comparing share prices as of December 1st across samples, we see a decline, as well. At this point, the stock is influenced by the book value – share price is lower, because the book value per share is lower.

Now consider share prices as of January 1st.

Comparing December to January within each sample, we see that the share price is adjusted down, probably reflecting the absence of trading.
Comparing the January values across samples, however, we see that the downward adjustment is less severe, the higher the dividend paid.
In other words, the stock ends up being worth more in sample IV than in sample I, because the dividend paid in sample IV was higher than that paid in sample I.

This finding is supported if we look at the ratio of book value per share to share price. Values below express the share price as a percentage of the book value per share:
I.) Dec 1st: 79%; Jan 1st: 59%
II.) Dec 1st: 80%; Jan 1st: 60%
III.) Dec 1st: 80%; Jan 1st: 62%
IV.) Dec 1st: 80%; Jan 1st: 64%

Again, as of December 1st, dividend payment has no influence on the (price) bv/s) ratio. Across all samples, this value remains essentially constant.
Only as of January 1st is dividend payment factored in. The higher the dividend paid, the higher this ratio.

What happens if you pay a higher dividend, is that your company is worth less, because it gives away money, and yet, people will be willing to pay more for its stock, as reflected in the higher price of shares (in absolute numbers, and, even more so, relative to the book value per share).

In this trial, I have isolated the influence of dividend payments on share price.
Other factors that influence share price more strongly are trading and the economic state. Precisely because these factors have more visible and immediate consequence, they can be more easily observed in the game. This should not mislead us to the conclusion that dividend payments are irrelevant.

Unless evidence to the contrary is presented, I will consider it fair to say that high dividend payments increase the share price.

[PaulJohann]

Puuuuuuuh!!!
Think it will take some time to understand this. Anyway, the conclusion is very clear and definetely answers the question. Thanks.
Paul