In my opinion, I quite agree that investor can make an extra ordinary profit from the dividend payment announcement made by Microsoft. And here’s why. Microsoft is market efficiency. According to the dividend signalling, it stated that higher dividend to be paid out, will generate higher share price and vice versa. When a company increases their dividend payout, it gives a strong signalling that they expect the future cash flows will sufficient and the prospect of the future will be positive. The bright future prospect of the company also let the investors believes that the company is able to gain some returns to the shareholders.
Based on the article, Microsoft announced to pay out 32 billion dividends to their shareholders, doubled the annual dividend to 32 cents. This can be said that is favourable signal because when Microsoft increases the dividends, the share price will also going up. Besides, we also can see the signals from the company to buy back the shares. Company gives a signal that the current share is undervalued or has a bright prospect by repurchasing the stocks. This action signals that company is able to pay an attractive dividend to the investors. Microsoft announced to buy back 30 billion of its stocks. This situation will reduce shares outstanding and boost the earnings per share. So, this can be said that the share prices will be increased.
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Based on the article and the theory above, I agree that investor can gain extra ordinary profit due to the share price will increase. Next, based on the procedure for dividend payment, we can gain dividend before the ex-dividend date while we will get nothing if we purchase on or after ex-dividend date. Investors will get the extra amount that will be compound over the long term to enhance their returns after make an investment in the company before ex-dividend.
For an example, we assume that the analysis will exclude for the preferential tax treatment that qualified dividends get, and also not include the trading cost and also the time value of money. Given a company XYZ, announces that they will pay for RM 1 dividend, and the share price will drop slightly which is RM0.50 on the ex-dividend.
In this case, assume an investor buy the share RM 100 before ex-dividend and sell it for RM99.50, and he will get RM 1 after few weeks. This situation shows that the investor gains RM0.
50 on the trade by losing RM0.50 and giving RM1 dividend. Refer to the article, I think that investor can gain profit if they purchase the stock before ex-dividend. In conclusion, I still agree that investors can gain extra profit according to the theory that have been discussed at the above.