Dividend in IDX 101
Dividend 101
According to Wikipedia, dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings).
This article summarizes what you need to know about dividend distribution among Indonesian listed companies.
Dividend Distribution Mechanism in IDX
The Announcement
When an Indonesian listed company is planning to distribute dividend to its shareholders, it is going to be announced during an RUPST (Rapat Umum Pemegang Saham Tahunan).
Remember, dividend distribution is rarely announced during RUPSLB (Rapat Umum Pemegang Saham Luar Biasa). Notice the different between RUPST vs RUPSLB.
From the announcement, you should be able to obtain its Dividend Per Share. From this figure, you will be able to calculate how much money you are going to make by multiplying it with the number of shares you have.
So for example, if a stock issues Rp 100,- per share and you have 10,000 shares, equivalent to 100 lot (1 lot = 100 shares) you will receive Rp 1.000.000,- gross in terms of dividends.
The Schedules
The dividend do not get distributed right away into your bank account. For a dividend payment, there are 3 dates you should be aware of:
Cum date
You must own the stocks until the end of day of this date for you to be eligible for dividend payments.
The amount of dividend distributed is equal to number of shares you own at the end of Cum date, multiplied by dividend per share.
Ex date
Shortened form of “Expiry Date”.
If you own the stock until Cum date and sell the stock during Ex date, you are eligible for the dividends.
Vice versa: If you do not own the stock during cum Cate and just entered during Ex date, you will NOT be eligible for dividend
Payment date
This is the date when your dividend is paid (calculated during Cum date) to your investment account (RDN).
Simulation
Confused? Let’s do a simulation.
The figure below shows the latest dividend payment by Bank BCA (IDX:BBCA).
End of Cum Date (28 Mar 23): You own 5,000 shares of BBCA
End of Ex Date (29 Mar 23): You add another 5,000 shares of BBCA, total: 10,000 shares
Payment Date (14 Apr 23):
Total dividend received in your RDN: 5000 shares x IDR 170 = IDR 850,000
The Dividend Trap
You may observe a phenomenon where a stock price goes down drastically after Ex-date. Example below: Bank CIMB Niaga (IDX:BNGA).
Disclaimer: this is not a stock recommendation to Buy / Sell.
This phenomenon is commonly known as Dividend Trap.
You may ask, why does this happen? Because of 3 words: Short term speculators.
There are people who bought the stock a few days before the Cum date and sell them right on Ex date (because they know they are already guaranteed to be paid with the dividend). This creates a selling pressure which drives the stock price, proportionate to the percentage of dividends relative to the price. In other words, the stock price will drop as much as the amount of dividends issued per share.
In the case of BNGA, dividend is Rp 115.16 per share. The price closing at cum date is at around Rp 1.330,- and the lowest trading price is Rp 1.240,-. The price drop (Rp 90) is pretty close to the amount of dividend issued (Rp 115.16).
Will the price recover?
Perhaps this is the million dollar question and the answer is it usually depends on the prospect of the companies. If the company has good prospects, means we expect it to grow their earnings sustainably, then yes the price should recover. This is because dividends issued in the coming year should be greater than dividends issued this year.
However, if we do not expect the company to grow or maintain their earnings, then it is quite likely that price recovery is more difficult. When the price drop is higher than the amount of the dividend that is issued and the price does not recover, that is what it is people referred to as dividend trap.
Huge dividends give investors the impression that a company is performing really well because they issue a huge payout. However, if the company’s earnings is only one off and their earnings are not consistent (or cyclical in nature), then it is unlikely that the company will keep up giving that much dividends to investors and this would be reflected in the share price that is hard to recover.
The Takeaway
Do you know what happened to the BNGA stock just a few days after dividend Ex-date? Oh yeah, it rose by another 29% (not including dividend) 😎.
Here’s how the chart look like if the dividend were included, cool huh?
In conclusion, investors should not worry about short term stock price fluctuations i.e. because of dividend Ex date (unless you are a short term speculators of course 😂). Keep focusing on the big picture by understanding the company’s fundamentals & prospects.
In fact, dividend can be a compounding machine.
If you know a company’s prospect is bright and you are pretty sure next year’s earnings is going to increase, you do not need to worry about buying and selling your stock and receive a bigger dividend payment next year. Or even better, you re-invest your dividend and make your dividend payment next year compound. The best part? This is done without worrying day-to-day stock price fluctuation! 😎
This is how the legendary Warren Buffet got rich with his purchases on GEICO, Coca Cola, See’s Candies, Bank of America and Apple. All these companies have stellar earnings growth, hence stellar dividend growth as well, all dividends obtained from these companies were used to re-invest in other cash-generating machines.
Contrary to popular beliefs, he did not get rich by buying and selling his stocks.
Learning from this wisdom, this becomes Recompound’s core investment philosophy, discussed extensively in our previous blog:
Let’s get rich together slowly, but more surely, with Recompound!