For some investors corporate actions (CA) might be a blessing in disguise while it's a curse for others, depending on which side of the profit line you stand. But corporate actions form part of the investment journey and should be taken note of.
So, what is a corporate action?
Simply put, it is an event that has a material impact on a company and its shareholders, both common and preferred shares as well as the bond holders. These changes are usually approved by the company’s board of directors.
Some examples of corporate actions are name changes, dividends, rights offer, share split or share consolidation, unbundling and mergers and acquisitions.
For the investor these events might be non-elective, like a name change. Or it could be an elective event where the corporate action might require the share holder to select an option given by the company.
How do I find out what’s happening?
Most exchanges nowadays share the upcoming events calendar on their websites, which will show investors which possible events (earnings, dividends, IPOs etc.) are expected in the given month. Remember, for the most part nothing is set in stone until you receive confirmation from the exchange, the company itself.
Investors are informed by the issuer or broker when there is a corporate action that might materially affect them, or where the investor needs to elect an option. Take note that this will only happen when you are a shareholder in the company that the corporate action is pertaining to.
Digging into dividends
Let’s dive into some of the fun stuff and take a closer look at the one corporate action every investor loves, and that’s dividends. This is a reward for being a loyal shareholder. As in sticking with the company through thick and thin, the ups and downs, and holding on for dear life.
But is that the only way you can get dividends, to stay invested in the company?
The short answer is “no". You do not have to hold the stock until infinity and beyond to qualify for dividends. For years sophisticated investors have modeled their investment strategies around the buying of shares on the last day to trade (LDT), in order to get the dividends, before selling once they've received them. This strategy is known as “dividend stripping”.
Technical stuff - dividends
Keep in mind that a company can decide to keep its after-tax profits within the business and not pay a dividend.
There are a couple of dates to take note of when buying shares just for the dividends:
- Announcement date: when a company declares a dividend to its shareholders.
- The Last Day to Trade (LDT) you have until close of business on the LDT to buy the share for the dividend. When the share is still trading with the dividend it’s called “cum-dividend”.
- Ex-dividend: The day after LDT the share price adjusts for the payout of the dividend, usually lower.
- Payment date: the day on which the dividend is expected to be paid to the investor.
Scenario: You want to buy Apple just for the dividend
Suppose Apple is trading at $240 per share (cum dividend) with a declared $10 per share dividend. You have until the close of business on the last day to trade (LDT) to buy Apple, with its closing price at $240. The following day (ex-dividend) the share price adjusts and goes lower (in most instances to $230 for the dividend payout). After the ex-dividend date, you get paid the Apple dividend on the specified dividend payment date.
Any impact on the listed company?
The impact this strategy has on a listed company can be seen through the share price which gets affected. Share prices may have upward pressure on cum-dividend (with dividend) day and downward pressure ex-dividend (without dividend). The degree to which the share price is affected depends upon the liquidity of the share and who is doing the dividend stripping.
The dividend payment process
There is a validation process that takes place between the LDT to the payment date by the share issuer to make sure all the beneficial owners of the share are paid. The Book Close date is the date when all the records of shareholders must be updated by, this is normally 3 days from the LDT date, before moving over to the transfer secretary. Every issuer has their own. Thereafter will it go to the broker company, which will then do a final recon before passing the dividend on to the client.
The pitfalls of this strategy may include but are not limited to the following:
- Upon declaration of a good dividend share prices might elevate as it attracts long-term investors.
- Ex-date sell offs may be excessive if the dividend has a special pay-out purpose or if a lot of dividend strippers are at work.
- Tax implications if initiated on a large scale or frequently.
