Equity value dividend issuance question
Hey guys, I was ripping through the guides earlier, specifically the equity and enterprise value sections, and I stumbled upon a question.
The guides say when you issue dividends, it decreases a company's equity on their balance sheet (through retained earnings post dividend issuance dropping) which therefore reduces its equity value - because equity value represents the market value of a company's equity. The guide's end result is that LTM P/E drops purely due to the lowered equity value. Also, EV/EBITDA and EV/Revenue stayed the same.
My issue with this is I thought equity on the balance sheet is not representative of the market value of a company's equity since shareholder's equity can deviate away from the company's current market price overtime, additional paid-in capital isn't really relevant since there was no issuance/repurchase above/below market value and retained earnings likely doesn't make up the gap between shareholders equity and market value of equity.
I understand how enterprise value stays the same if equity value does drop since assuming the cash is excess, its a net wash, but I just can't wrap my head around how issuing dividends can reduce equity value. I would say I don't understand the main point:
- The assumed 1:1 correlation between equity value on the balance sheet and current market value of equity
Additionally, I could see how issuing dividends could reduce the equity value from the definition of equity value being the value of everything a company owns but only to equity investors because the company is down $1000 in cash and that's a part of the company's total assets. Am I reading the guide wrong? If someone has 2 cents they can chip in to weigh in on this, I'd be super grateful.
T=0
Enterprise value from your DCF: $100 Cash: $10 Debt: $50 -> Net debt: $40. Equity value: $60
Company pays a dividend of $10.
Enterprise value from you DCF still $100 --> EV stays the same Cash $0, Debt still $50 -> net debt $50 Equity value $50.
Conclusion 1:1 correlation between equity value and paying out a dividend. 0 correlation with Enterprise value.
More info on ex-dividend date and markets Investopedia
There is nothing as T0. It’s a theoretical way to look at it which has no relevance with practical world
U have no clue what you're talking about. Let's take an example: Telenet announced a superdividend in 2018. It was paid to whoever held a share at COB 1 Oct 2018
The extraordinary dividend will be paid on October 4, 2018 with the Telenet shares trading ex-dividend as of the opening of the Brussels stock exchange on October 2, 2018. Source
Telenet investor relations - stock price history Close October 1, 2018: 47.12 Open October 2, 2018: 42.30
I am not doubting your knowledge, but just politely challenging you there. LBObuyout 's logic makes more sense. Also, you've only provided one example which does back your point. But to be sure on how market reacts, one needs to observe stock price reactions for dividend issuances over time and see how the empirical data stacks up. That said, let's think about equity valuation in the context of a DDM. If dividend issuance goes up, one would expect stock price to increase..My point is I am hypothesizing that market's reaction can't be predicted
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