Don't Ignore the Dividends: Australian Share Market Was Up Today (Not Down)

Most of the financial media reported that the Australian share market fell today (Thursday 7 November) by 0.2%. Various reasons were given, including that two of Australia's largest banks traded ex-dividend.

The reality is that the share market rose by 0.3%, if looked at properly.

What do I mean?

Yes, ANZ Bank (ANZ) and National Australia Bank (NAB) did trade ex-dividend today. Last week's post reported on these dividends. The share price of these banks was expected to fall today by the value of the dividends, as a seller of the shares gets to keep the dividends, and a buyer does not receive the dividends.



In addition, the Bank of Queensland (BOQ) also had a dividend for which today was the ex-dividend date.

So, what did happen?

• ANZ's share price fell $1.42. ANZ's dividend was 91 cents, but with 39 cents franking credits was worth $1.30 to an Australian investor. So, ANZ's value only fell 12 cents ($1.42 - $1.30).
• NAB's share price fell $1.21. NAB's dividend was 97 cents, with 41.6 cents franking credits, for a total value of $1.386 for Australians. NAB's value rose 17.6 cents ($1.386 - $1.21).
• BOQ's share price fell 21 cents. The 30 cent dividend (and 12.9 cents franking credits) was worth 42.9 cents for Australian investors. BOQ's value rose 21.9 cents (42.9c - 21c).

 

Taking these three dividends into account, with their franking credits, the Australian share market rose by 0.3%.

Taking the dividends into account tells a totally different story. Instead of focussing on negative reasons for a share market fall, the media should have been looking for the positives which produced the rise in share prices (after adjusting for the dividends).

Why was this error made by the financial media? Because they focus on the share price alone, and treat the dividends as a side-show.

If a market gardener took her produce to market and sold all of it for cash at a good profit she would be very happy with the day's trading. If, however, we ignore the cash she takes home, she is worse off because she now has no produce.

Ignoring the cash she takes home is a silly thing to do. But, that is exactly what the financial media have done with the shareholders of the three banks. Yesterday the shareholders owned shares. Today they own the same shares, but also have the right to receive the cash dividends and associated franking credits. When both the share price change and the dividend entitlements are considered there was a small value decline for ANZ and small value increases for NAB and BOQ. 

Successful long-term investors know that dividends are the main event, and that the long-term share price follows the long-term dividend changes.

There is an Accumulation index which includes dividends. This index did go up 0.15% today. But the media does not focus on this index, and it was not mentioned in most reports. This index is not perfect either. It does not include franking credits, so understates the value of any dividends which are franked.

Tomorrow (Friday 8 November) the same mistake will be repeated when Westpac Bank (WBC) also goes ex-dividend. The cash dividend is 98 cents per share, plus 42 cents franking credits. If the share price falls by $1.40, an Australian investor will have no change in the total value of their investment.

As one of Australia's largest companies WBC's share price falling by $1.40 will reduce the share price index by 0.3%. The financial media can be expected to focus on the share price fall.

The morale of this story is simple:

• Don't ignore the dividends (or the franking credits)