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Author: salem25 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 28  
Subject: Stock Dividend Theory Date: 3/17/1998 1:15 AM
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Well, I've done a little investigation (a VERY little), and I've got a theory for the enigmatic "stock dividend". (Anyone surfing by this board, feel free to post right in and make us smart. TMFCheeze, you got the TMF prefix. How 'bout helpin' us out here? "Teach us to fish," as the Gardner's would say.)

I think this 20% dividend is "legit", as GASPAR asks. I don't think that this is a split, because they would just call it so if it was. A stock split is done by a company to lower its share price to make it more "trade-able". (A $6-7 pricetag is no place for a split.) After a stock split, you can expect the share price to drop equivalently such that the value of your position remains unchanged. (Although, the rate of increase in the value of a share over time may stay unchanged, and your investment would then be growing at a slightly higher rate than it was before the split.)

A dividend is paid by a company to its shareholders as the profit from its business (after subtracting what it believes it needs to stay in business or what it needs to grow). Shares outstanding for FAME are around 1.5M. I believe that FAME will issue another 20% of shares to its shareholders on the payout date. Thus, a holder of a 100 share block will receive another 20 shares. And around 300k more shares will be issued in all. It's what happens after this that is important.

FAME values its stock for purpose of the dividend at $6.25 (you can infer this from the fact that fractional shares will not be issued, but rather paid at the rate of $6.25). 300k shares at $6.25 is $1.857M. The question is, does FAME have this kind of cash to give away. From looking at their 1997 year-end report, I kinda think so. (FAME had current assets totaling $5.3M at the end of 1997.) Thus, I don't expect the share price to drop significantly (relative), and I expect to realize a 20% return on my investment. Remember, a stock split has nothing of real value behind it, but a dividend is a real payment to the shareholders.

This might seem like "a lot of money to spend on trying to get your company exposed," but it's only a 60 second commercial spot during prime time on a major television network. Think about the advertising some companies spend to get their products noticed. It seems FAME would rather spend this money on getting its shares noticed in the market. All we need is some mutual funds to start buying big chucks, and the price will rise significantly. (An overt goal of the board of directors IS to increase shareholder value.)

I'll admit that there is one gaping hole in my theory. Why aren't people jumping all over FAME to get a quick 20% return as GASPAR suggests? (BTW GASPAR, FAME wouldn't care exactly who owned the shares and what they did with them. They pay the same amount of shares no matter who owns them--whether they're in stockholder's name or in street name.) Hmmm, perhaps everyone (else) is expecting the share price to drop accordingly. Or perhaps the notification hasn't quite done its job of getting the company noticed. We'll see, won't we? I think I'll call investor relations tomorrow. The cost of a phone call has got to be "in the noise" when you're investing for retirement.

--Snow
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