KAT Exploration Inc (KATX)

[TinkerBelle]

Silver, Homevendor...also very interesting.....Thanks!

Dividends of 25% or More of a
Company's Stock Price

Cash dividends of 25% or more of a company's stock price represent a fraction of one percent of all dividends paid and are handled quite differently from normal dividends. There are some similarities, however. Like normal dividends, unusually large dividends have a declaration date, a record date, an ex-dividend date and a payment date. Also, like normal dividends, the ex-dividend date for a dividend of 25% or more of a company's stock price is set by the exchange, not the company. Here's the big (and confusing) difference: While the ex-dividend date is indeed set by the exchange, it occurs not before the record date, but after. In fact, the ex-dividend date is not even before the payment date! By rule, the ex-dividend date is one business day after the payment date. (In such cases the term deferred ex-date applies.)

Here's the exact quote from the New York Stock Exchange Listed Company Manual: "When the distribution is 25% or more, the Exchange will defer trading the security "ex" until one day after the mail date for the distribution."

And Nasdaq Rule 11140(b)(2) states: "In respect to cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security, the ex-dividend date shall be the first business day following the payable date."

Although the wording is slightly different, the meaning is the same.

This can be very confusing, having the ex-dividend date after the payment date. To further confuse things, in such circumstances, any shareholders of record who sell their shares before a deferred ex-dividend date also sell the right to receive the dividend. This is not optional to the seller, it is mandatory. The right to receive the dividend is contained in an attachment to the sold shares and that attachment is called a due bill.

The payment of a dividend via due bills is quite unlike a normal dividend payment. Shares that are purchased after the record date but before the deferred ex-date (the due bill period) are traded with a due bill attached. The chain of events that begins on the payment date works like this: The dividend is first paid to the shareholder of record, then, on the due bill settlement date, which is commonly two trading days after the ex-date, the dividend is withdrawn from the account of the shareholder of record who sold the shares during the due bill period and is then paid to the shareholder who bought the shares during the due bill period.

The dividend is paid to all shareholders of record first because that is the only information the company has on who is eligible for the dividend. The due bills are then executed by the stock brokerages of the buyers and sellers during the due bill period. The company does not participate in the due bill process.

A very unusual circumstance, to be sure. But there are good reasons for such a procedure.

On big percentage distributions one of the reasons the ex-date is after the payment date is to prevent the chaos that would be triggered if the the ex-date was before the payment date as is normally the case. For example, if the ex-date was before the payment date for a stock that was selling for $21 and they paid out a distribution of $7, such a dramatic drop in price could potentially, and unfairly, trigger margin calls in margin accounts holding the stock. To the stock brokerage it would appear that the total value of the stock had dropped precipitously when in reality the dividend that had not yet been paid would make up the difference. By making the dividend payment before the stock price is adjusted down on the ex-dividend date, no margin call would be issued because the value of the account would not be unfairly compromised.

Another reason for the use of due bills with stock dividends, spinoffs and extra large cash dividends is that it allows shareholders to receive the full value of their holdings if they choose to sell during the due bill period. Otherwise they would have to wait the days or weeks between a normal ex-dividend date and the payment date.

Note: Although this page is an explanation of how cash dividend dates work, deferred ex-dates are also used, under certain circumstances, with stock dividends, spinoffs and warrant issues. With those types of distributions the 25% threshold is not a factor, as often times the value of a spinoff or warrant is not known at the time of declaration. However, any time a deferred ex-date is applicable, no matter if the distribution is in cash or securities, the deferred ex-date rules explained here, including the due bill process, apply.


To summarize, in cases of a deferred ex-date, stock traded between the record date and the ex-date trades with a due bill attached that specifies that the right to receive the dividend is sold with the stock. With electronic trading and electronic book entry accounting, due bills are rarely seen by stock investors today but they are noted on the trade confirmation slips.

The Purpose of the Record Date

With all dividends, the record date establishes that only the shares outstanding as of that date are eligible for the dividend. With normal dividends that is a moot point because the ex-dividend date, being two business days before the record date, has already established which shares (and which shareholders) qualify for the dividend. But in the case of a dividend of 25% or more of the company's stock price, the ex-dividend date is after the record date, usually many days or weeks after, so the company may, if it chooses to do so, issue additional stock after the record date but before the ex-dividend date without affecting the gross amount of the declared dividend. While occasions of a secondary offering during such a period are rare, there are many more instances of shares being issued through dividend reinvestment plans and through exercise of stock options and convertible securities.

In cases of a deferred ex-date, the only function of the record date is to determine on which shares the dividend is paid. Because of that -- and this is a critical point -- it is the ex-dividend date that determines who qualifies for the dividend, not the record date.

While initially confusing, there are valid, rational reasons why on big percentage distributions the ex-dividend date is after the record date and after the payment date. It doesn't happen often, but big percentage distributions don't happen often. That's why most investors aren't familiar with how they work.



Note: As of February 21, 2012, Canada has adopted the same due bill process.

Summary

All the above dividend date information can be broken down to into five simple statements:

1. The record date determines which shares receive the dividend.

2. The ex-dividend date determines which shareholders receive the dividend.

3. For normal dividends, the ex-dividend date is two business days before the record date, unless the record date falls on an
exchange holiday or a Saturday, in which case the ex-date shall be one day earlier than it otherwise would have been. If the
record date falls on a Sunday, the ex-date will be two days
earlier than it otherwise would have been.

4. For dividends above 25% of the stock price of the company, the ex-dividend date is the first business day after the payment date.

5. Dividends are not free money - the price of the stock is reduced by the amount of the dividend at the open of trading on the ex-dividend date.

http://groupssa.com/understandingdividenddates.html