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"On October 16, 2012, TSR, Inc. (TSRI) issued a press release announcing that TSR's Board of Directors has declared a special dividend in the amount of $1.50 payable on November 30, 2012 to holders of record of TSR's common stock, par value $0.01 per share, on October 30, 2012" (8-K Filing)

On October 31, 2012, the day after the "record date", TSRI stock dropped approximately $1 or 20%. This was most likely due to a misunderstanding of how special dividends are paid when the dividend payout is greater than 25% of the value of the security. (Even Wikipedia has it wrong on their site.)

As Group SSA explains:

"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."

They also point out:

"Contrary to what is erroneously posted on several popular websites, to be entitled to receive a dividend of a stock trading with a deferred ex-dividend date, it is not required that you be a stockholder on the record date and hold your stock through the dividend payment date. As is true with all cash dividends, buy before the ex-date (even one day before) and hold at least until the ex-date and you will receive the dividend, even in cases of a deferred ex-date."

Basically, sellers of TSRI on October 31st, most likely thought that they are already on record to receive the dividend - which unfortunately for them is not the case. The stock will still trade with the "due bill" for the dividends until the ex-dividend date. The owner of the stock on the ex-dividend date will be entitled to the dividend.

Now (before November 31st and below $4.75) is a great time to enter the stock (as I did this morning). You will receive a $1.50 dividend and then own a company that is essentially cash flow neutral but has potential to start earning a decent ROE.

Quick overview of fundamentals is as follows:

  • 2m shares O/S
  • $8.7m of cash ($4.35/share)
  • $2.5m dividend to be paid ($1.5/share)
  • Net income and FCF neutral but potential to pick up in 2013.

Hat tip to Barel Karsan for originally bringing this situation to my attention.

As with all investing, there are risks involved with micro cap stock investing especially the likelihood of increased volatility. Do your own research and don't solely rely on articles like this one.

Disclosure: I am long TSRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: TSR, Inc. Investors Misunderstand Special Dividend Record Date