Tuesday, October 9, 2012

Sycamore: Beware of Ex-Dividend Date

I received a question from a reader who must be interested in participating in Sycamore Networks' (SCMR) massive special dividend. When it comes to dividends and special dividends, investors are trained to look for the ex-dividend date (the demarcation date that determines which shareholders receive the dividends and which do not), which is two or three days before the record date. Not in this case!

In Sycamore's case, the ex-dividend date is not only after the record date, but also after the payable date!

So, what gives? A careful reading of the Nasdaq Uniform Practice Code reveals that while the ex-dividend date normally falls before the record date, there is a circumstance in which it should fall after the payable date:

Normal Ex-Dividend, Ex-Warrants Dates

(1) In respect to cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25% of the value of the subject security, if the definitive information is received sufficiently in advance of the record date, the date designated as the “ex-dividend date” shall be the second business day preceding the record date if the record date falls on a business day, or the third business day preceding the record date if the record date falls on a day designated by Nasdaq Regulation as a non-delivery date.

(2) 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.

My take from this rule is that when a company's payout is deemed rather large, the normal rules don't apply so that investors not familiar with the payout dates don't get taken in a big way. In Sycamore's case, it would appear that even though an investor may be on register at the record date, he is still liable to pay out the proceeds from the special dividend up until the day after the cash is actually paid out!

An investor who doesn't pay attention to this quirk might be willing to sell shares of Sycamore for a major discount following the record date. Don't do that!

Disclosure: No position


Anonymous said...

So you mean i can buy the stock on 3 days prior to the ex-dividend date and still get the payout?

Saj Karsan said...

That's my reading of it, but I'm not saying there's no chance I'm wrong nor giving advice so don't sue me if that's incorrect!

Anonymous said...

In this case, you could have bought the stock one minute before the market close on the 11th and received the dividend that night.

Investors need to watch carefully for this. I'm not sure if the record date has any relevance at all, but the typical relationship with the ex-date is broken in the case of a large dividend. My rule is to ignore what any press release names as the record date and wait to see what ex-date is officially listed by the exchange. If there is no ex-date listed in time, be very careful about any trading between the "normal" ex-date and the date of the dividend.

Anonymous said...

Saj -
Great post. I learned this lesson the hard way (with TNRK about 18 months ago). I went through 3 Charles Schwab reps before one finally referred me to the 25% rule..... Given the possible increase in dividend tax rates, this article could be very timely as some overcapitalized stocks may decide to pay out.

Anonymous said...

For large payouts the stock is traded with "Due Bills," so there is no arb - the stock will not open up on ex date lower in price by the amountof the dividend as is usually the case.