32 lines
2.1 KiB
Plaintext
32 lines
2.1 KiB
Plaintext
Inputting Dividend Data into the
|
||
Pricing Model
|
||
Often dividend payments are regular and predictable. With many
|
||
companies, the dividend remains constant quarter after quarter. Some
|
||
corporations have a track record of incrementally increasing their dividends
|
||
every year. Some companies pay dividends in a very irregular fashion, by
|
||
paying special dividends that are often announced as a surprise to investors.
|
||
In a truly capitalist society, there are no restrictions and no rules on when,
|
||
whether, or how corporations pay dividends to their shareholders.
|
||
Unpredictability of dividends, though, can create problems in options
|
||
valuation.
|
||
When a company has a constant, reasonably predictable dividend, there is
|
||
not a lot of guesswork. Take Exelon Corp. (EXC). From November 2008 to
|
||
the time of this writing, Exelon has paid a regular quarterly dividend of
|
||
$0.525. During that period, a trader has needed simply to enter 0.525 into
|
||
the pricing calculator for all expected future dividends to generate the
|
||
theoretical value. Based on recent past performance, the trader could feel
|
||
confident that the computed analytics were reasonably accurate. If the
|
||
trader believed the company would continue its current dividend policy,
|
||
there would be little options-related dividend risk—unless things changed.
|
||
When there is uncertainty about when future dividends will be paid in
|
||
what amounts, the level of dividend-related risk begins to increase. The
|
||
more uncertainty, the more risk. Let’s examine an interesting case study:
|
||
General Electric (GE).
|
||
For a long time, GE was a company that has had a history of increasing
|
||
its dividends at fairly regular intervals. In fact, there was more than a 30-
|
||
year stretch in which GE increased its dividend every year. During most of
|
||
the first decade of the 2000s, increases in GE’s dividend payments were
|
||
around one to six cents and tended to occur toward the end of December,
|
||
after December expiration. The dividends were paid four times per year but
|
||
not exactly quarterly. For several years, the ex-dates were in February, June,
|
||
September, and December. Option traders trading GE options had a pretty |