Forum Archive Index - November 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Allan Potts wrote

>
>According to my PC, RBD closed on Friday at $1.33 and there was a
>4.5 cent dividend  paid at the close which should have translated to 
>an unchanged opening price today at 1.285.  Yet I look at my screen 
>today and see a  price of 1.28 together with a reported net change of 
>+ 1.7.  Is this the new math I've heard so much about, or have I 
>missed something.
>

I think this is caused by the way the dividend payments are treated for 
tax Allan.  A 4.5c dividend for those living in New Zealand translates to 
a 6.8c dividend with 2.3c of tax already removed from it (assuming you 
are paying the company tax rate of 33% as most fund managers are).

Looking at the dividend on a 'pre-tax' basis gives 

$1.33-$0.068= $1.262

If the actual RBD opening price was $1.28, that means it has risen 

$1.28-$1.262= +1.8c

That is close to the +1.7c gain your PC reported.  Perhaps the 0.1c 
difference is due to rounding error somewhere in the calculation?

Footnote:

I must admit the the way the numbers are presented does not sit 
comfortably with me.    If I had sold my RBD shares at $1.33 on Friday 
(and so lost my dividend entitlement) and bought them back at $1.28 
Monday (and we are ignoring all brokerage costs) then by my 
calculation I have made 5c per share on the deal, not 6.8c.

If I was a trader, then my 5c 'profit' per share would be reduced by tax 
(assuming a tax rate of 33%) to only 3.3c.   Clearly trying to 'trade' this 
share around the dividend would have been a very bad move.   On a 
pre-tax basis your return would be more than doubled (to 6.8c) by 
simply 'buying and holding' over the dividend period.   But thinking that 
the buy and hold investor has just got 6.8c is also misleading because 
the only income that will arrive in our buy and holder's bank account is  
4.5c.    

If, as an investor, I wanted out of RBD  I could have sold on Friday at 
$1.33 or sold today at $1.28 plus, my 4.5c dividend.

$1.28+ $0.045= $1.325

That means my bank account is worse off if I sold today, to the tune of 
0.5c per share.  Therefore claiming that the share price has 'gone up' 
by 1.7c doesn't seem right at all.  My memory may be fuzzy, but I am 
almost certain it never used to be like this.  Did NZX CEO Mark 
Weldon change the rules on accounting for dividends?

It seems to me that the way the NZX reports share price changes after 
a dividend announcement is misleading.   Can anyone out there justify 
it?

SNOOPY




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