CHAPTER FIVE COMMON STOCK Practical Investment Management Robert A Strong Outline 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 South-Western / Thomson Learning © 2004 5-2 Outline 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 South-Western / Thomson Learning © 2004 5-3 Outline 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 South-Western / Thomson Learning © 2004 5-4 Corporations, Shares, and Shareholder Rights 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 South-Western / Thomson Learning © 2004 5-5 Corporations, Shares, and Shareholder Rights Shareholder Rights 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 South-Western / Thomson Learning © 2004 5-6 The Mystique of Dividends: Types of Dividends cash dividends - paid in cash Some firms have an optional dividend reinvestment plan South-Western / Thomson Learning © 2004 5-7 The Mystique of Dividends: Types of Dividends Selected Dividend Reinvestment Plans FIRM Chase Manhattan Bank (CMB,NYSE) Central Maine Power (CTP, NYSE) Green Mountain Power (GMP, NYSE) Hibernia Corp (HIB, NYSE) York Financial (YFED, NASDAQ) South-Western / Thomson Learning © 2004 DISCOUNT FROM MARKET PRICE 5% 5% 5% 5% 10% 5-8 The Mystique of Dividends: Types of Dividends Insert Figure 5-5 here South-Western / Thomson Learning © 2004 5-9 The Mystique of Dividends: Types of Dividends stock dividends - paid in additional shares of stock property dividends - the pro rata distribution of a physical asset South-Western / Thomson Learning © 2004 - 10 Stock Splits: Why Stock Splits Do Not Matter The value of a firm cannot be increased by splitting, or combining, its shares South-Western / Thomson Learning © 2004 - 17 Stock Splits 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 South-Western / Thomson Learning © 2004 - 18 The Financial Page Listing 52 Weeks Hi Lo 25.38 20.38 Yld Stock Sym Div AtlanEngy ATE 1.54 Vol Net % PE 100s Hi 7.2 12 21.25 20.88 21.25 371 Lo Close Chg Footnotes and Symbols boldface type, underlined, s, n, dd, g, x, South-Western / Thomson Learning © 2004 , , , - 19 +.13 The Financial Page Listing new 52-week high cc dd g n pf s wt x new 52-week low PE ratio > 100 loss in the most recent four quarters dividends and earnings in Canadian dollars newly issued in the past 52 weeks preferred stocks stock split/stock dividend > 10% in past 52 weeks warrant ex-dividend South-Western / Thomson Learning © 2004 - 20 Categories of Stock A blue chip stock usually has a long history of uninterrupted dividends 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 South-Western / Thomson Learning © 2004 - 21 Categories of Stock Insert Table 5-2 here South-Western / Thomson Learning © 2004 - 22 Categories of Stock Insert Table 5-3 here South-Western / Thomson Learning © 2004 - 23 Categories of Stock Insert Table 5-4 here South-Western / Thomson Learning © 2004 - 24 Categories of Stock 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 South-Western / Thomson Learning © 2004 - 25 Categories of Stock Insert Table 5-5 here South-Western / Thomson Learning © 2004 - 26 Categories of Stock 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 South-Western / Thomson Learning © 2004 - 27 Categories of Stock Insert Table 5-6 here South-Western / Thomson Learning © 2004 - 28 Review 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 South-Western / Thomson Learning © 2004 - 29 Review 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 South-Western / Thomson Learning © 2004 - 30 Review 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 South-Western / Thomson Learning © 2004 - 31 ... 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 ... 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 ... 52 weeks preferred stocks stock split /stock dividend > 10% in past 52 weeks warrant ex-dividend South-Western / Thomson Learning © 2004 - 20 Categories of Stock A blue chip stock usually has