Seeking Alpha from Dividend Announcements: Big-Data Insights from Joining CAR and EVA Style Analysis

Abstract

The authors conduct a big-data analysis to assess the pricing impact of dividend announcements. They join the traditional cumulative abnormal return (CAR) approach to estimating abnormal returns with economic value added (EVA) style analysis. The empirical results are significant for a sample of 172,481 dividend announcements during the 23 years from 1997 through 2019. For active investors, alpha-generating trading returns may be available by longing the stocks of dividend-increasing companies and shorting the stocks of dividend-deceasing companies. A notable finding linked to EVA style analysis is that alpha returns on dividend-increasing companies were available on the stocks of value-creating growth companies, the stocks of underinvesting companies, and especially the stocks of “wise contraction or cyclical restructuring” companies in need of a turnaround growth signal. Alpha returns on dividend-decreasing companies were available on the stocks of value-destroying growth companies and the “wise restructuring” companies. The authors also find significant dividend announcement CARs and potential alpha-generating trading opportunities across 10 S&P-classified sectors.

TOPICS: Security analysis and valuation, quantitative methods, big data/machine learning, performance measurement

Key Findings

• ▪ The authors conduct a big-data analysis of 172,481 dividend announcements on stock returns in the 1997–2019 period. Their CAR findings on dividend-increasing and dividend-decreasing companies confirm both information signaling at time of announcement and the potential for alpha-generating trading returns (long–short) during the immediate days thereafter.

• ▪ Based on EVA style classifications, they find that alpha returns on dividend-increasing companies were available on the stocks of value-creating growth companies, the stocks of underinvesting companies with positive EVA (ROIC > WACC), and especially, the stocks of “wise restructuring” companies in need of a turnaround growth signal. Alpha returns on dividend-decreasing companies were potentially available by shorting the stocks of value-destroying growth companies and the “wise restructuring” companies.

• ▪ They also find significant dividend announcement CARs, along with potential alpha-generating trading opportunities, across 10 S&P-classified sectors.