Amid the current challenging environment, some Malaysian companies have reduced their dividend payout. While share investors are fretting about how dividend payouts will fare in other Malaysian companies for this year, warrant investors might also be wondering how their warrants will be affected. Today’s newsletter article will clarify this for investors…

How are warrants affected by company dividends?

Firstly, warrant holders do not receive dividends declared by the underlying stock. However, this does not mean warrant holders are disadvantaged as dividends, based on the dividends distributed in recent years, on the underlying stock are already forecasted into the pricing of the warrant.

Typically, companies will see their share prices fall by the dividend amount declared on the ex-dividend date as shareholders have received the dividend amount in cash. Since warrants track the movement in underlying shares, some may assume that the fall in share price would mean the price of the call warrants over the underlying should also fall whilst the price of put warrants would increase.

However, assuming all other factors remain constant, and the dividend on the ex-date is the same as that which has been forecast, there would be no change to the price of the call warrants if the price of the underlying shares falls by the dividend amount on the ex-dividend date. Similarly, the price of the put warrants will not increase in such a scenario. This is because the dividends have already been priced into the warrant.

When can dividends affect call and put warrants?

While regular dividends do not affect the price of warrants, surprise dividends can.  Surprise dividends, or changes in dividends, that have not been forecasted while pricing can lead to a drop in the price of a call warrant and an increase in the put warrant. Such examples include special cash dividend, special bonus cash dividends etc.

Other corporate actions and their impact

Corporate actions such as special dividends, share splits and rights issues etc, are adjusted by making changes to the warrant terms. For example, exercise prices and the warrants per share figure of the warrants will be lowered on the ex-dates, so that warrant holders are not disadvantaged by the corporate actions announced.

To illustrate further, assuming ABC Berhad (Share price: RM3.00) announces a special cash dividend of RM0.300 which will go ex on Friday.  When Friday comes, the exercise price of ABC-CA (call warrant over ABC) will need to be adjusted lower by 10% (RM0.30/RM3.00) as well.  Similarly, the exercise ratio for ABC-CA will also be adjusted downwards by 10%.

ABC-CA (prior to ex-date)
Exercise price: RM2.50
Exercise ratio: 10 to 1

ABC-CA (on ex-date)
Exercise price: RM2.25
Exercise ratio: 9 to 1