Practice investment management pim3 ch05 common stock

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)
York Financial (YFED, NASDAQ)

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DISCOUNT
FROM

MARKET PRICE
5%
5%
5%
5%
10%

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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
firm’s 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

25.38 20.38

Yld
Stock

Sym Div

AtlanEngy ATE 1.54

Vol

Net

%

PE 100s

Hi

7.2

12

21.25 20.88 21.25

371

Lo Close Chg

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

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,

,

,

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The Financial Page Listing


new 52-week high


cc
dd
g
n
pf
s
wt
x

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

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Categories of Stock

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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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