Impact on Multiples on Ex-Dividend Date
I received this question and just wanted to run it by everyone.
What is the impact on a company's P/E, EV/EBITDA and P/BV multiples after the stock goes ex-dividend?
P/E and EV/EBITDA are straightforward. P/E goes down and EV/EBITDA stays the same (if I'm correct).
What is the answer for P/BV though?
My answer was:
- Price goes down by dividend amount
- BV goes down by dividend amount
- Therefore, no impact to P/BV
Does the P/BV multiple that the company is currently trading at impact the result?
I've had this in a few interviews. P/BV only stays the same if the ratio is 1.0x. If the ratio is above 1, it goes up. Conversely, if the ratio is below 1, it goes down. Illustration: P/BV 1.0x: (100/100) - Both go down by 50, P/BV stays at 1.0x P/BV 2.0x (200/100) - Both go down by 50. P/BV goes up to 3.0x (This is because the -50 has more of an impact on the smaller number than on the larger) P/BV 0.5x (100/200) - Both go down by 50. P/BV goes down to 0.33x Does this make sense?
EV/EBITDA would actually go down also. Price goes down which lowers market cap which lowers EV.
EDIT: Don't listen to me, see below haha
cash goes down, so net debt goes up, so EV stays the same
As long as you are making the right adjustments to the GAAP financials and thinking economically, the answers given thus far are correct [EV/EBITDA stays the same because excess cash balances lower equity value, P/E goes down, P/BV depends on whether it is above or below 1X]. But it's worth noting that someone looking at the previous quarter financials has to actively make these adjustments or they will be looking at the wrong figures. And in terms of EV/EBITDA, while it's true that cash effectively goes down on the ex-dividend date, in reality cash hasn't left the building yet, it's balanced against a "dividends payable" account. So you saw the balance sheet on the ex-dividend day, you wouldn't actually see a reduction in cash, only a shift from retained earnings to a dividend payable account.
My point being that the thinking in this thread is 100% right economically but the accounting is a bit more complicated so you have to make the right adjustments to get numbers that match the economics.
No one adjuting net in come for foregone interest on cash?
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