It's never fun to see shares of a company in which you invest fall by double-digit percentage points, with no press releases or other news to explain what happened. Shares of Ligand Pharmaceuticals
One-time dividends explained
Two weeks ago, Ligand announced plans to pay out $253 million ($2.50 a share) in a one-time distribution to shareholders. This announcement came after an earlier decision to break the company up by selling off some its drug programs.
The ex-dividend date for investors who wanted to receive the $2.50-a-share payout was April 3; only shareholders who held the stock before that date will receive it. Those who buy shares of Ligand stock on April 3 or thereafter will own a stock with $2.50 a share less on its books. Therefore, in order to make any shareholders after the ex-dividend date equal to shareholders receiving the dividend, the stock price must fall by an amount equal to the dividend payout.
Current shareholders aren't any worse off from the fall in stock price, either. Theoretically speaking, if shares of Ligand were fairly valued before the dividend payout, the stock should rightly fall by an amount equal to the payout. Instead of owning roughly $10 per share in Ligand stock, investors who get the dividend now have $7.50 a share, plus the $2.50 in cash from the dividend. Thus, even with the 25% slide in shares, they're no worse off than before.
You might wonder why a company would even bother returning cash to shareholders this way. If no better options were available to Ligand -- such as an acquisition, or building out its internal research and development team -- it may make sense to give the cash back to shareholders, rather than let it sit on the balance sheet, earning a low rate of return.
Plenty of companies have initiated one-time dividends. Satellite TV operator EchoStar
The downside of the one-time dividend
One negative component to a one-time distribution is the signal management may be sending to investors regarding the value of the firm and its growth prospects. If Ligand's executive team thought that shares were undervalued at this point, they should have used the cash to buy back shares. Ligand did institute a $100 million share buyback in conjunction with the dividend, but it could have opted to put a greater percentage of the dividend payout toward the buyout. Also, considering that drugmakers need to continue pumping out new compounds to stay operational the long run, a signal that Ligand's R&D team has no good use for the cash should be a bit unsettling to shareholders.
That said, even though we don't invest in the stock market to have our investment dollars returned to us via one-time distributions, I'd much rather see companies in which I own shares return the cash to shareholders, rather than waste it on frivolous projects or acquisitions.
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Fool contributor Brian Lawler has lots of ex-dates and is still waiting for his one-time lottery ticket payout. He does not own shares of any company mentioned in this article. Microsoft is an Inside Value pick. The Fool has a disclosure policy.