What is Cutting a Melon
Cutting a melon is a phrase used when a company decides to issue an extra dividend that is above and beyond the original schedule of dividend payouts, which will be distributed to some or all of its shareholders. This additional dividend may come in the form of cash, stocks or property.
Breaking Down Cutting a Melon
Cutting a melon is the prerogative of the board of directors (B of D). The B of D sets a company’s dividend policy, which determines whether and how to distribute earnings with shareholders in the form of dividends. A company’s dividend policy may pay shareholders in proportion to fluctuating corporate earnings, or it may offer a payout indifferent to short-term fluctuations. Dividends typically come monthly or quarterly, but they may come at other regular intervals, such as semi-annually or annually.
After a period of higher-than-average earnings, the B of D may choose to cut a melon, i.e., distribute the extra profit proportionally among shareholders, rather than add it to retained earnings, which a corporation may use to reinvest or pay down debt.
Unlike a scheduled dividend payment, a payment that comes from cutting a melon is determined by the B of D on a case-by-case basis. It may be issued to shareholders as a separate disbursement over and above the regular number of scheduled dividend payments, though for the sake of convenience, the company’s internal accounting may associate it with a scheduled divided payment.
For example, if a company with 1 million shares earned $4 million in profit beyond what it had anticipated, its B of D may choose to cut a melon, issuing a special dividend payment of $4 per share. To cut a melon while keeping more cash on hand, the B of D may choose to issue the payment in stocks instead.
Companies That Are More Likely to Cut a Melon
Blue chip companies, large corporations that have weathered multiple downturns, are in the best position to cut a melon when faced with an unexpected surplus. Young startup companies with ambitions to grow much larger, on the other hand, have a greater incentive to reinvest the surplus profit in the business itself.
Economists disagree on the value of dividends in general. Some consider dividends to be the ultimate measure of a company’s value. Others argue that whether a company pays a dividend is irrelevant to the investor. There are those who advocate never paying dividends. Therefore, a company’s dividend policy, as well as its decision to cut a melon, may be determined as much by its business philosophy as by its stature and longevity. Berkshire Hathaway, a multinational conglomerate, famously hasn’t paid a dividend to its investors since 1967.