COMMON STOCK CHAPTER FIVE Practical Investment Management Robert A. Strong

South-Western / Thomson Learning ©  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 Outline

South-Western / Thomson Learning ©  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 Outline

South-Western / Thomson Learning ©  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 Outline

South-Western / Thomson Learning ©  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. Corporations, Shares, and Shareholder Rights

South-Western / Thomson Learning ©  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. Shareholder Rights Corporations, Shares, and Shareholder Rights

South-Western / Thomson Learning ©  cash dividends - paid in cash Some firms have an optional dividend reinvestment plan. The Mystique of Dividends: Types of Dividends

South-Western / Thomson Learning © The Mystique of Dividends: Types of Dividends Selected Dividend Reinvestment Plans DISCOUNT FROM FIRMMARKET PRICE Chase Manhattan Bank (CMB,NYSE) 5% Central Maine Power (CTP, NYSE) 5% Green Mountain Power (GMP, NYSE) 5% Hibernia Corp. (HIB, NYSE) 5% York Financial (YFED, NASDAQ) 10%

South-Western / Thomson Learning © The Mystique of Dividends: Types of Dividends Insert Figure 5-5 here.

South-Western / Thomson Learning ©  stock dividends - paid in additional shares of stock  property dividends - the pro rata distribution of a physical asset The Mystique of Dividends: Types of Dividends

South-Western / Thomson Learning ©  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 The Mystique of Dividends: Special Distributions

South-Western / Thomson Learning ©  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. The Mystique of Dividends: Special Distributions

South-Western / Thomson Learning © 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 The Dividend Payment Procedure

South-Western / Thomson Learning ©  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. The Dividend Payment Procedure

South-Western / Thomson Learning ©  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. Why Dividends Do Not Matter

South-Western / Thomson Learning ©  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. Stock Splits: Forward and Reverse Splits

South-Western / Thomson Learning © The value of a firm cannot be increased by splitting, or combining, its shares. Stock Splits: Why Stock Splits Do Not Matter

South-Western / Thomson Learning ©  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. Stock Splits

South-Western / Thomson Learning © Footnotes and Symbols boldface type, underlined, , , , s, n, dd, g, x,... The Financial Page Listing 52 Weeks Yld Vol Net HiLo StockSym Div % PE 100s Hi Lo Close Chg AtlanEngy ATE

South-Western / Thomson Learning © The Financial Page Listing  new 52-week high  new 52-week low ccPE ratio > 100 ddloss in the most recent four quarters gdividends and earnings in Canadian dollars nnewly issued in the past 52 weeks pfpreferred stocks sstock split/stock dividend > 10% in past 52 weeks wtwarrant xex-dividend

South-Western / Thomson Learning ©  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.  A blue chip stock usually has a long history of uninterrupted dividends. Categories of Stock

South-Western / Thomson Learning © Categories of Stock Insert Table 5-2 here.

South-Western / Thomson Learning © Categories of Stock Insert Table 5-3 here.

South-Western / Thomson Learning © Categories of Stock Insert Table 5-4 here.

South-Western / Thomson Learning ©  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. Categories of Stock

South-Western / Thomson Learning © Categories of Stock Insert Table 5-5 here.

South-Western / Thomson Learning ©  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 Categories of Stock

South-Western / Thomson Learning © Categories of Stock Insert Table 5-6 here.

South-Western / Thomson Learning ©  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 Review

South-Western / Thomson Learning ©  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 Review

South-Western / Thomson Learning ©  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 Review