clientele effect

Clientele Effect

The theory that a company's stock price will move according to the demands and goals of investors in reaction to a tax, dividend or other policy change affecting the company. The clientele effect assumes that investors are attracted to different company policies, and that when a company's policy changes, investors will adjust their stock holdings accordingly. As a result of this adjustment, the stock price will move.

Notes:

Consider a company that currently pays a high dividend and has attracted clientele whose investment goal is to obtain stock with a high dividend payout. If the company decides to decrease its dividend, these investors will sell their stock and move to another company that pays a higher dividend. As a result, the company's share price will decline.

See also: Corporate Action, Dividend, Dividend Payout Ratio, Dividend Policy, Material News, Stock

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Clientele effect

Describes the tendency of funds or investments to be followed by groups of investors who have similar preferences for a firm which follows a particular financing policy, such as the amount of leverage it uses.

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clientele effect

The tendency of different securities to attract different types of investors, depending on the dividend policy of the issuer. For example, certain investors are attracted to stocks (for example, electric utility stocks) with high dividend yields while other investors, in high income-tax brackets, prefer stocks with lower dividend yields but more capital gains potential.

Case Study Following the close of security markets on September 25, 2001, Winn-Dixie Stores, Inc., announced the firm would slash its $1.02 annual dividend. The Jacksonville, Florida, supermarket chain was one of few large corporations that paid monthly dividends, a costly policy that attracted a clientele of investors who valued the regular current income. The monthly dividend of 8.5¢ per share was to be reduced to an expected 5¢ per quarter. The firm's policy had been to declare three monthly dividend payments at the beginning of each quarter. Under the new plan, only the quarterly dividend would be declared. At the time of the dividend announcement the firm also indicated first-quarter earnings would be in the range of 15¢ to 18¢ per share, a reduction from the previous projection of 24¢ to 30¢ per share. At the same time the company lowered its forecast for fiscal 2002 earnings. The announcement was bad news for stockholders, who saw the value of their shares fall in price during trading on the day following the news. Winn-Dixie common stock fell $7.37 to $12.41, a 37% decline on very heavy volume. The firm's chief financial officer said the new dividend policy would give Winn-Dixie more financial flexibility at the same time it placed added emphasis on capital appreciation rather than cash payments to stockholders. The large price decline indicated existing stockholders apparently didn't appreciate the new emphasis.