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Figuring out Receivables, Trading Dividends and Profiting from Splits

Herb Greenberg

First up this week is Anne Stirlin, who writes: "Is it possible for a nonprofessional to gain access to info like you often present, such as receivables not being billed in a timely fashion, delays in payment, etc.? Does a company put this in the 10-Q or elsewhere?"

Nope, you don't think a company would do that, do you? That would make it too easy to spot when they're stuffing the distribution channel or getting customers to take more product than they might ordinarily want, by letting them take their time to pay.

One way to determine if the company is stretching is to check the receivable turnover rate. This tells how fast a company collects its money. Get your calculator and divide total annual sales by the average of the most recent two years' accounts receivable. Thirty days is normal, but it really varies by industry, so be sure to check competitors.

As a backup, check days sales outstanding. This shows how many days of sales haven't yet been collected. The longer, the more suspect. Divide the accounts receivables by the average sales per day -- which is sales divided by 365. Again, 30 is a good target, but it varies by industry.

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• Memo to Neil Kumpers, who wonders if it's possible to trade stocks just to get dividends: Yes, it is, and here's how you'd do it. When a company offers a dividend, it sets both a record date and a distribution date; everyone who is an "owner of record" by the former receives a dividend on the latter. After a company notifies its exchange of the record date, the exchange sets an ex-dividend date for two days prior to that date. Since most trades take three business days to settle -- that is, for ownership to officially transfer from seller to buyer -- you'd receive the dividend as long as you bought the stock at least a day before the ex-dividend date.

  Free money, right? Wrong! On the ex-dividend date, the stock's opening price will drop by the amount of the dividend. If you were to turn around and sell the stock, this devaluation would cancel out your dividend gain, leaving you with a very negative surprise: income tax to pay on the dividend. Not the smartest trading strategy, unless your chief concern is padding the federal budget surplus.

  Trading for dividends was very popular for a short while in the late 1980s, when large Japanese insurance companies started making large-volume dividend captures because of since-changed legislation in that country that required that insurers' dividend payments to policyholders come from the company's own dividend income. But dividend plays made a lot more sense for those companies than they do for the individual investor today. In fact, because of the issue of tax liability, the National Association of Securities Dealers' Rules of Fair Practice prohibit brokers from touting this practice, which it refers to as "selling dividends."

• Memo to Bob Samokar, who wonders what happens when you trade a soon-to-be-split stock between the record and the distribution dates: As with dividends, shareholders who've purchased shares three days before the record date receive the split distribution. Now, if one of these shareholders wants to sell the stock before the distribution has occurred, he would have two options: He could sell the shares along with a "due bill" that promises to deliver the split shares when they are distributed; or, he could sell the shares on what's called a "when-issued basis," in which case the trade won't settle until three days after the split is distributed. When the trade does settle, the ownership of the split shares will transfer from seller to buyer.

• Memo to Lundeen, who wonders what to make of headlines describing trades as being "crossed by" a single broker: Lundeen, there are only two kinds of "crossing:" legal and illegal. Crossing trades happen when a broker gets two market orders for the same stock; that is, one order to buy stock X at market price and one order to sell stock X at market price. The broker can match the orders, but only if he first offers them to the public at a price higher than the buy order's bid.

• Memo: Have a question? The dumber you think it is, the better. Just shoot it to MonEmailbag@thestreet.com. Include your full name, and please, no questions seeking personal financial advice or regarding personal brokerage disputes. And this reminder: Because of the volume of mail, personal replies can't be guaranteed.