EI 4 Sources of Equity Returns

How companies return cash to owners, how the dividend timeline works, and how to compute price and total return on shares. Check-yourself items are study aids.

Shareholders are entitled to any discretionary distribution a company makes, in proportion to their ownership. These distributions differ in form and in timing: some issuers pay cash on a regular schedule, some make a one-off payment, and some pay nothing at all. Distributions are authorised by the board, and in some jurisdictions a shareholder vote is also required.

Cash dividends

A regular cash dividend is a cash payment made at known intervals, and it represents a return of capital to shareholders. Early-stage companies with attractive growth options tend to reinvest their cash and pay little or nothing. As a company matures and generates surplus cash flow with fewer places to reinvest it, initiating a dividend becomes more likely. Even so, some highly profitable firms deliberately pay no dividend.

Payment frequency is regional. United States and Canadian issuers tend to pay each quarter; firms in Europe and Japan most often pay twice a year; and companies across Scandinavia, China, and many other markets usually pay once a year. Many issuers try to hold the dividend per share steady, because investors read a change as a signal. A maintained dividend signals management confidence that the payout does not meaningfully sacrifice future growth; a cut or suspension can signal expected weakness, or a decision to preserve cash for new opportunities. Firms often skip an increase when a jump in earnings looks temporary, and dividends can be forced to swing when a company restructures or moves through the economic cycle.

Anheuser-Busch InBev: a dividend that swung

Anheuser-Busch InBev (ABI), the largest global brewer, was assembled from AmBev, InBev, and Anheuser-Busch. In the seven years after the 2008 Anheuser-Busch deal, the stock climbed nearly tenfold: from a November 2008 low near EUR12.89 it reached a November 2015 high of EUR121.95, while the dividend rose from under EUR1 to more than EUR6.00 per share. The 2015 agreement to buy rival SABMiller, closed in October 2016 for over USD100 billion, coincided with slowing beer demand. Regulators forced disposals of key brands on poor terms, earnings fell, and ABI cut its dividend in 2018, 2019, and 2020 to a low of EUR0.50 per share, only raising it again in 2023.

Taxes on dividends vary by jurisdiction, but investors are generally taxed on cash dividends in the period they receive them, and some jurisdictions require the company to withhold tax and remit only the net amount.

An extraordinary or special cash dividend is a payment from a company that does not distribute on a regular schedule, or a one-time top-up on top of a regular dividend. It might return an unexpectedly strong year of earnings or the proceeds from selling an investment, and it is typically larger than the ordinary dividend. In February 2023, despite a net loss for 2022, Ford Motor Company announced a special dividend of USD0.65 per share tied to the sale of roughly 90 percent of its stake in the electric-vehicle maker Rivian (over 90 million shares, a USD1.8 billion gain), paid alongside its regular USD0.15 per share dividend. A related form is a liquidating dividend, which returns capital instead of distributing earnings, used when a company winds down or sells part of its business; it can exceed accumulated retained earnings.

Share repurchases

A share repurchase, or buyback, is a company using cash to buy its own shares. It is an alternative route for returning cash. The key contrast with a dividend is who receives the cash: a dividend reaches every shareholder, while a buyback pays only those who choose to sell. Repurchased shares are set aside, so they do not receive dividends, do not vote, and do not count in earnings-per-share calculations.

In aggregate, a buyback and a cash dividend of equal size have the same effect on total shareholder wealth, though the realised returns of individual shareholders can differ.

Example 1 · Worked

Zhao Corporation has 10 million shares trading at CNY20 each, together with CNY50 million of cash on hand. It will return the cash either as a one-time CNY5 per share dividend to all holders, or by repurchasing shares at the current price. Ignore taxes and assume no price change.

1. What return does a holder realise under the dividend? 2. How many shares remain after the repurchase?

Solution. A CNY5 dividend on a CNY20 share is a realised return of CNY5 divided by CNY20, which is 25 percent.

Spending CNY50 million at CNY20 retires CNY50 million divided by CNY20, which is 2.5 million shares, leaving 7.5 million outstanding.

The two routes distribute the same CNY50 million, but only the selling shareholders get cash under the buyback.

Managers give several reasons for buying back stock:

To signal that shares look undervalued, to support the price, or to shift the debt-to-equity ratio.
To gain flexibility on the size and timing of distributions, cutting payouts back when investment opportunities are richer, which a regular dividend does not allow.
To give investors tax efficiency where dividend tax rates exceed capital gains rates, and to avoid double taxation.
To offset the new shares created when employee stock options are exercised, managing the effect on earnings per share.
To lift earnings per share by reducing the share count during a reporting period.

Unlike regular dividends, which issuers try to keep steady, buybacks may be announced years ahead but executed opportunistically as prices move. Adidas historically returned cash only through dividends, then launched a EUR1.5 billion three-year buyback in 2014; the first EUR300 million tranche was bought in November 2014 at an average of EUR61, below the EUR75 average price for the first nine months. A larger EUR3 billion plan followed in March 2018, and from 2018 to 2020 Adidas spent nearly twice as much on buybacks as on dividends, continuing with over EUR1 billion in 2021 and over EUR2.5 billion in 2022 (including Reebok divestiture proceeds), while guiding to dividends of 30 to 50 percent of net income. Some firms return cash entirely through buybacks: several large US technology companies, such as Alphabet, long paid no dividend yet spent billions each quarter on repurchases.

Stock dividends and share splits

A stock dividend (also termed a bonus issue) hands out freshly issued shares in place of cash. Sometimes the company hands out more of its own common shares; sometimes it spins a division off as a separate company, as General Electric did when it distributed shares of GE HealthCare Technologies and GE Vernova to narrow its focus toward aerospace. Because a stock dividend of the company’s own shares simply splits the same equity value into more pieces, it changes neither the total value nor any owner’s proportional stake. It is therefore not income and not relevant to valuation.

A stock split (or forward split) raises the share count and lowers the price per share in the same proportion, so market value of equity and each owner’s claim are unchanged. The usual motive is to keep the unit price inside a range that trades well. Price matters for trading because it drives the relative cost of the bid-offer spread. A USD0.03 spread on a USD4.00 stock is a steep 1.5 percent round-trip cost (0.03 times 2, divided by 4), which can deter investors. The same USD0.03 spread on a USD1,000 stock is only 0.006 percent (0.03 times 2, divided by 1,000), possibly too thin to attract market makers.

Two ways to handle a soaring price: Amazon vs Berkshire

Amazon.com listed as an online bookseller in June 1997 and rose to roughly 50 times its IPO price in the late-1990s internet boom, splitting three times so that one original share became 12 shares by September 1999. The price sat near USD80 in early 2000 and topped USD3,000 by the end of 2021; in 2022 Amazon ran a 20-for-1 split, bringing the price back near USD100. Berkshire Hathaway did the opposite. Its Class A shares listed in March 1980 at USD290 and reached about USD542,000 by the end of 2022, a 186,900 percent rise with no split. To let investors own a lower-priced share, Berkshire issued Class B shares in 1996 at one-thirtieth of the Class A price; those Class B shares split 50-for-1 in 2010 and now trade near one fifteen-hundredth of the Class A price.

A reverse stock split runs the other way: it cuts the share count and raises the price per share proportionally, again leaving equity value and ownership unchanged. Firms use it to meet an exchange minimum price, or to lift the price into a better trading range, often while restructuring. After nearly failing, Bombardier shed most divisions to focus on business jets; its share price had fallen almost 95 percent from a July 2018 peak to a low of CAD0.28 in November 2020. In 2022 shareholders approved a 25-for-1 consolidation of both share classes, which cut the share count by a factor of 25 and lifted the price to CAD26.86 on the split date. Sentiment recovered as the strategy delivered, and the price exceeded CAD50 by the end of 2023.

Example 2 · Worked

Baixo Corporation stock has climbed from EUR800 to EUR1,600 per share. The CFO wants to split it into a range of EUR70 to EUR90 per share.

Which split ratio fits best: 10-for-1, 20-for-1, or 25-for-1?

Solution. An X-for-1 split gives a new price of the old price divided by X. A 20-for-1 split gives EUR1,600 divided by 20, which is EUR80, squarely inside the target band. A 10-for-1 split leaves EUR160, above the range; a 25-for-1 split gives EUR64, below it. So 20-for-1 is the right choice.

Check yourself

Kettlewood has paid a GBP10 dividend for three years. It now halves the dividend and uses the freed cash to repurchase shares. How does this change realised returns?

Every shareholder sees the cash dividend halved. Only the holders who choose to sell into the buyback receive the extra cash and realise the additional return. So all shareholders take the 50 percent dividend cut except those who sell.

Once the board (and shareholders, where needed) votes to pay a dividend, the payout follows a standard sequence of dates.

Declaration date: the day the company formally announces a specific dividend.
Ex-dividend date (ex-date): the first day a share trades without the right to the upcoming dividend. Buy on or after this date and you do not receive the payment.
Record date: the day, one or two business days after the ex-date, on which a holder registered with the depositary is treated as the owner for the dividend. The gap to the ex-date exists because trades take time to settle: settlement is the official transfer of shares to the buyer and cash to the seller, and with two-day settlement the record date sits two days after the ex-date so that trades placed before the ex-date are settled in time.
Payment date: the day the company actually transfers the cash to shareholders.

Figure 1: Dividend payment chronology

Illustrative spacing. The record date follows the ex-date by the settlement lag; the payment date comes about two weeks after the ex-date.

Because a buyer on or after the ex-date is not entitled to the pending dividend, the share price falls on the ex-date by roughly the dividend, all else equal. In practice that clean drop is masked by ordinary intraday moves. If the prior close was USD20.00 for a USD1.00 dividend, the stock might open at USD19.00 on the ex-date (down by the full dividend), then drift to close at USD19.20 as the broad market and company news push it around. The observed change on the ex-date decomposes as follows.

Figure 2: Price on the ex-dividend date (USD1.00 dividend)

The overnight drop from 20.00 to 19.00 is the dividend; intraday moves then carry the price to a 19.20 close.

Example 3 · Worked

Tech Mahindra declared an INR32 per share dividend with an ex-date of 21 July 2023. Its stock closed at INR1,252.95 on 20 July and INR1,195.10 on 21 July. The stock is a member of the broad NIFTY 50 Index, which dropped that day from INR19,979.15 to INR19,745.

Split the ex-date percentage decline into the dividend, the market move, and the company-specific move.

Solution. The total decline is INR1,195.10 minus INR1,252.95 over INR1,252.95, which is −4.62 percent. The dividend accounts for INR32 divided by the prior close: −32 over 1,252.95 is −2.55 percent. The market accounts for the index move: 19,745 minus 19,979.15 over 19,979.15 is −1.17 percent. Substituting into the decomposition, −4.62 percent equals −2.55 percent plus −1.17 percent plus the company-specific change, so the company-specific move is −0.90 percent. Without that company-specific effect, the expected decline would have been the smaller 3.72 percent (−2.55 percent plus −1.17 percent).

Example 4 · Worked

Verizon declared a USD0.665 quarterly dividend, payable 1 February 2024 to holders of record on 10 January 2024. On 8 January the stock closed at USD40.10 and the S&P 500 at 4,763.54; on the ex-date, 9 January, the stock closed at USD39.04 and the index at 4,756.50.

What share of Verizon’s ex-date decline reflects company-specific price changes?

Solution. Total return on the day is 39.04 minus 40.10 over 40.10, which is −2.65 percent. The dividend effect is −0.665 over 40.10, or −1.66 percent. The market effect is 4,756.50 minus 4,763.54 over 4,763.54, or −0.14 percent. The expected ex-date decline is therefore 1.80 percent (1.66 plus 0.14). The company-specific piece is what is left: −2.65 percent minus −1.80 percent equals −0.85 percent.

Check yourself

Wiley Creek declared a AUD1.25 quarterly dividend on Monday 7 January, payable 1 February to holders of record on 10 January. With two-day settlement, on which day would the price be expected to fall by the dividend?

The ex-dividend date is the first day the stock trades without the dividend, one business day before the 10 January record date, so 9 January. The price drop is expected on 9 January, not on the record date or the 1 February payment date.

Return over a holding period comes from two sources: cash distributions and the change in price (a capital gain or loss). Investors use current and historical prices, adjusted for any splits, to measure returns over a day, a week, a year, or any chosen horizon. The formulas below ignore taxes.

No dividend: price return only

If the company pays nothing over the period, the return is just the price change. For a share bought at price P at time t and worth P at time t plus 1, the realised return is as follows.

A share bought at USD20.00 and sold at USD22.50 returns 22.50 minus 20.00 over 20.00, which is 12.50 percent.

With a dividend

Any dividend the investor is entitled to over the period belongs in the numerator. For a share bought at P, paying a dividend D at time t plus 1 when the price is P, the total return is as follows.

The same USD20.00 share now pays a USD1.00 dividend and ends at USD22.50: the return is 22.50 minus 20.00 plus 1.00 over 20.00, which is 17.50 percent. With no dividend the term D is zero and this reduces to the price-only formula.

When a company issues a stock dividend or runs a split or reverse split during the period, the share count changes, so the purchase price and the dividend per share must be put on the same footing before computing return.

Example 5 · Worked

Take the same holding: bought at USD20.00, a USD1.00 dividend at the end, and an ending price of USD22.50, for a 17.50 percent total return. Now suppose the issuer runs a 1-for-5 reverse split at period end, and the dividend is paid at that same moment.

What is the holding period return after the reverse split?

Solution. The reverse split multiplies the per share figures by 5. The ending price becomes USD112.50 (22.50 times 5), the entry price on the same basis is USD100 (20.00 times 5), and the dividend becomes USD5 (1.00 times 5). The return is 112.50 minus 100 plus 5 over 100, which is 17.50 percent, identical to before. A split or reverse split rescales price and dividend together, so it leaves the return unchanged.

Reinvested dividends

Reinvested dividends are cash dividends the investor uses to buy more shares of the same company. A dividend D reinvested at the prevailing payment-date price P buys D over P additional shares. When the dividend arrives partway through the period, the return picks up appreciation on those extra shares.

Example 6 · Worked

An investor buys at USD20.00 and the price ends at USD22.50. The USD1.00 dividend now arrives halfway through the period, when the price is USD21.00.

1. Find the return if the dividend is invested at a 1 percent risk-free rate to period end. 2. Find the return if the investor instead buys shares at USD21.00 with the dividend.

Solution. 1. Held at the risk-free rate for the remaining half-period, the USD1.00 grows to USD1.005 (1.00 times 1.01 to the power 0.5). Using the dividend formula, the return is 22.50 minus 20 plus 1.005 over 20, which is 17.525 percent. 2. Reinvested at USD21.00, the dividend buys 1 over 21, or 0.04762, of a share. Applying the reinvestment formula, the return is 22.50 times (1 plus 1 over 21), minus 20, all over 20, which is 17.857 percent. The extra fractional share appreciates to USD22.50, lifting the total return above the plain 17.50 percent case. Reinvestment (like a reverse split) can leave the investor holding a fractional share.

Over long horizons, reinvested dividends can add up to a large share of total return, and the split between price and dividends differs sharply across markets. From February 2004 through February 2024 the price-only French CAC 40 roughly doubled while the price-only Indian NIFTY 50 rose over 1,200 percent; on a total-return basis the CAC gained over 400 percent and the NIFTY over 1,500 percent. Dividing the price index by the total-return index isolates the pure price component.

Price versus total return, February 2004 to February 2024

EI 4 Sources of Equity Returns
Index	Price index	Total-return index	From price	From dividends
NIFTY 50 (India)	1,211.74	1,563.34	77.5%	22.5%
CAC 40 (France)	209.95	408.63	51.4%	48.6%

For the NIFTY 50, 77.5 percent of the 20-year total return (1,211.74 over 1,563.34) is pure price appreciation and the remaining 22.5 percent comes from reinvested dividends. For the CAC 40, only 51.4 percent (209.95 over 408.63) is price, with 48.6 percent from dividends. The developing Indian market leans more on capital gains for its higher long-run return, while the more developed French market leans more on dividends; the two indexes also differ in sector mix, with financials, information technology, and energy dominating the NIFTY and industrials and consumer names dominating the CAC. Note that reinvested dividend income is generally taxed, which dampens realised total returns.

Price as present value

Turning the return formulas around, a share price today should equal the present value of what the owner expects to receive: future distributions plus the expected sale price at the horizon. For a non-dividend payer, rearranging the price-only formula gives the following, where the future price is an expectation and r is the required return on equity.

If the firm pays a dividend at t plus 1, today’s price adds the present value of that expected dividend.

Over n periods with a constant dividend D paid each period and an expected terminal price at the end, today’s price discounts every cash flow at the required return.

Example 7 · Worked

An analyst sets a one-year target of EUR55 on Volksbein AG, and the investor uses a 12 percent annual discount rate.

1. What would the investor pay today with no dividend? 2. What if Volksbein announces a EUR2.50 year-end dividend? 3. Using a three-year target of EUR65 with a constant EUR2.50 dividend, what is the price, and how is it split between dividends and price appreciation?

Solution. 1. With no dividend, EUR55 over 1.12 is EUR49.11. 2. Adding the dividend, EUR2.50 plus EUR55 over 1.12 is EUR51.34; the difference from part 1 is the present value of the dividend, EUR2.50 over 1.12, which is EUR2.23. 3. Discounting three years of EUR2.50 dividends plus the EUR65 terminal price gives EUR2.50 over 1.12, plus EUR2.50 over 1.12 squared, plus EUR67.50 over 1.12 cubed, which is EUR52.27. The three dividends are worth EUR6.00 in total, or 11.5 percent of the price (6 over 52.27), while the discounted terminal price of EUR46.27 (65 over 1.12 cubed) supplies the other 88.5 percent.

The lesson from part 3 generalises: when a constant dividend is expected forever, the present value of dividends dominates the price, but when the horizon is finite the discounted terminal value usually outweighs the interim cash flows, unless the time horizon is quite long or the discount rate quite high. If the firm pays no dividend, growth in the firm’s net assets is what drives today’s price.

Example 8 · Worked

An investor buys a stock at USD75. After one year the price is USD85 and it pays a USD3.00 dividend, which the investor reinvests. After the second year the price is USD80 and it again pays USD3.00.

What is the two-year holding period return?

Solution. The first-year dividend buys 3 over 85 of a share; the second-year dividend arrives at the end and simply adds to the ending price (it does not compound). Using the reinvestment formula, the return is (80 plus 3) times (1 plus 3 over 85), minus 75, all over 75, which is 14.57 percent. The same answer comes from compounding the yearly returns: Year 1 is (85 plus 3 minus 75) over 75, which is 17.33 percent, and Year 2 is (80 plus 3 minus 85) over 85, which is −2.35 percent; then (1.1733) times (0.9765) minus 1 is 14.57 percent. Simply adding both dividends to the second-year price would give 14.67 percent, which mishandles the reinvestment, and adding the two yearly returns would give 14.98 percent.

Example 9 · Worked

An analyst sets a five-year target of EUR75.00. The stock just paid a EUR3.00 dividend, expected to grow 4 percent a year, and an 8 percent discount rate applies.

Estimate the current price.

Solution. Each dividend grows at 4 percent and is discounted at 8 percent, and the EUR75 target is added in Year 5. The dividend stream is EUR3.12, EUR3.24, EUR3.37, EUR3.51, and EUR3.65 for Years 1 through 5. Discounting all five dividends and the EUR75 terminal price at 8 percent gives EUR64.46. Starting from a Year 1 dividend of EUR3.00 instead of the grown EUR3.12 would understate the price at EUR61.98, and growing the dividend at 4 percent forever while ignoring the EUR75 target would overstate it at EUR78.00.

Example 10 · Worked

Bryce Limited traded at GBP76 two years ago. One year ago it paid a GBP5.00 dividend when the price was GBP96, then completed a 2-for-1 split immediately after. Today it paid another GBP5.00 dividend and trades at GBP82.

What is the two-year holding period return, reinvesting the one-year-ago dividend?

Solution. Put everything on today’s share basis. The earlier prices and dividend are halved by the 2-for-1 split. The split-adjusted figures are as follows.

Bryce Limited, split-adjusted

EI 4 Sources of Equity Returns
Measure	t = −2	t = −1	t = 0
Price	76	96	82
Dividend	–	5	5
Split factor	–	2	–
Split-adjusted price	38	48	–
Split-adjusted dividend	–	2.50	–

Using the split-adjusted entry price of 38, the reinvested dividend of 2.50 at a price of 48, and today’s 82 price plus 5 dividend, the return is (82 plus 5) times (1 plus 2.50 over 48), minus 38, all over 38, which is 140.87 percent. Ignoring the split would give 20.4 percent, and ignoring the dividend just received would give 127 percent.

Check yourself

An investor buys at CAD200. After a year the issuer runs a 4-for-1 split, then pays a CAD3.00 dividend with the price at CAD58. What is the one-year holding period return?

Adjust the purchase price for the split: CAD200 over 4 is CAD50. The return is (58 plus 3 minus 50) over 50, which is 22.0 percent. Adjusting the dividend up or down instead of the entry price gives the wrong answers of 40 percent or 17.5 percent.

Check yourself

Caddell trades at GBP80.76 and is expected to be worth GBP60 in five years, with an 8 percent discount rate. What is the relative impact of that future price on today’s price?

Discount the future price and divide by today’s price: 60 over 1.08 to the fifth power is about GBP40.84, and 40.84 over 80.76 is 50.6 percent. Skipping the time value of money (60 over 80.76) would overstate it at 74.3 percent.

Overview

Where equity returns come from

Dividends, repurchases, and splits

Cash dividends

Share repurchases

Stock dividends and share splits

Dividend payment chronology

Price return and total return

No dividend: price return only

With a dividend

Reinvested dividends

Price as present value