CHAPTER FIVE

COMMON STOCK

Practical Investment Management Robert A. Strong

Outline

Corporations, Shares, and Shareholder Rights

Corporations Shares Shareholder Rights

The Mystique of Dividends

Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter

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Outline

Stock Splits
Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends

The Financial Page Listing

The Basic Information Footnotes and Symbols

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Outline

Categories of Stock
Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols

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Corporations, Shares, and Shareholder Rights

People who own stock have an equity interest in the organization.

If a business has shares of stock, it is organized as a corporation rather than a proprietorship or a partnership. The shares of some corporations are closely held, while others are publicly held.
The two types of stock are common stock and preferred stock.

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Corporations, Shares, and Shareholder Rights

Shareholder Rights

the right to receive declared dividends on a pro rata basis the right to vote - Some companies have more than one class of stock. the right to maintain ownership percentage - The mechanics of the preemptive right are accomplished by a rights offering.

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The Mystique of Dividends: Types of Dividends

cash dividends - paid in cash Some firms have an optional dividend reinvestment plan.

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The Mystique of Dividends: Types of Dividends

Selected Dividend Reinvestment Plans

FIRM Chase Manhattan Bank (CMB,NYSE) Central Maine Power (CTP, NYSE) Green Mountain Power (GMP, NYSE) Hibernia Corp. (HIB, NYSE)

DISCOUNT FROM MARKET PRICE 5% 5% 5% 5% 10%

York Financial (YFED, NASDAQ)

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The Mystique of Dividends: Types of Dividends

Insert Figure 5-5 here.

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The Mystique of Dividends: Types of Dividends

stock dividends - paid in additional shares of stock property dividends - the pro rata distribution of a physical asset

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The Mystique of Dividends: Special Distributions

spin-offs - a parent firm divests itself of a subsidiary, and all the shares in the subsidiary are distributed proportionally to the shareholders in the parent split-offs - a parent firm divests itself of a subsidiary, and the shareholders must make a choice between keeping shares in the parent, or exchanging them for shares in the separated subsidiary
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The Mystique of Dividends: Special Distributions

An increasingly common type of recapitalization is the issuance of shares called tracking stock. These shares track the performance of a subsidiary, and in many respects, are just a new class of shares.

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The Dividend Payment Procedure

The Chronology of Events 1. date of declaration Ex-dividend date (2 business days prior to the date of record) 2. date of record

3. date of payment

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The Dividend Payment Procedure

A dividend paid in accordance with a previously announced corporate policy is a regular dividend. Companies usually pay dividends quarterly. A firm that wishes to make an extra distribution of cash to the shareholders does so through a special dividend, also called an extra or extraordinary dividend.

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Why Dividends Do Not Matter

Paying dividends reduces the amount in a firms checking account, and hence the shares are worth less.

On the ex-dividend date, share prices tend to fall by about the amount of the dividend.

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Stock Splits: Forward and Reverse Splits

A stock split is an accounting decision to change the number of shares outstanding without selling any more to the public. With a forward split, also called a regular way or direct split, shareholders end up with a greater number of shares than before the split. With a reverse split, the number of existing shares is reduced.

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Stock Splits: Why Stock Splits Do Not Matter

The value of a firm cannot be increased by splitting, or combining, its shares.

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Stock Splits

The primary motivation for a stock split is usually a desire to reduce the share price.

Large reverse splits often reduce the number of shareholders.

The difference between a stock split and a stock dividend is purely an accounting phenomenon. With a stock split, the par value of the stock changes by the split factor. With a stock dividend, the par value is not affected.
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The Financial Page Listing

52 Weeks Hi Lo Stock Sym Div 25.38 20.38 AtlanEngy ATE 1.54 Yld % 7.2 12 Vol PE 100s 371 Hi 21.25 20.88 21.25 Net Lo Close Chg +.13

Footnotes and Symbols boldface type, underlined, s, n, dd, g, x, ... , , ,

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The Financial Page Listing

cc dd g n pf s wt x new 52-week high new 52-week low PE ratio > 100 loss in the most recent four quarters dividends and earnings in Canadian dollars newly issued in the past 52 weeks preferred stocks stock split/stock dividend > 10% in past 52 weeks warrant ex-dividend

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Categories of Stock

A blue chip stock usually has a long history of uninterrupted dividends.

Income stocks are those that historically have a higher-than-average payout ratio (the proportion of net income after taxes paid as a dividend). A cyclical stock is one whose fortune is directly tied to the state of the overall national economy.
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Categories of Stock

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Categories of Stock

Insert Table 5-3 here.

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Categories of Stock

Insert Table 5-4 here.

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Categories of Stock

A defensive stock is largely immune to changes in the economy.

Growth stocks reinvest most of their earnings rather than paying them out as dividends and may be good candidates for above-average returns.
A speculative stock has a high probability of a loss and a small probability of a large profit. Penny stocks refer to unusually risky, especially inexpensive shares.
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Categories of Stock

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Categories of Stock

Category overlap: The stock categories are not mutually exclusive.

A note on stock (ticker) symbols: - are usually between one and four letters - the letter after a decimal indicates the class of stock - under the NASDAQ system, the last letter of a five-letter symbol indicates what type the security is

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Categories of Stock

Insert Table 5-6 here.

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Review

Corporations, Shares, and Shareholder Rights

Corporations Shares Shareholder Rights

The Mystique of Dividends

Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter

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Review

Stock Splits
Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends

The Financial Page Listing

The Basic Information Footnotes and Symbols

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Review

Categories of Stock
Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols

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