When most people think of arrears, they immediately think of some sort of debt that is not being paid on time. While the application is a little different when it comes to investing, that still serves as a workable definition for arrears. In the world of stocks, bonds, and trading, arrears means back dividends that are owed to shareholders of the company. In a similar application, arrears can also be used to refer to interest payments to bond holders that were not paid when due. Here is how the concept of arrears works, and how it is possible for companies to find themselves in arrears with dividend and interest payments.
The serial bond is often one of the mechanisms for investing within a company. As serial bonds mature, they accrue an amount of interest that is due to the holder of the bond. As the bond reaches maturity, the interest is calculated and payment is made to the bondholder. However, if a company finds itself unable to meet the payments on the interest at the time the bond reaches maturity, the corporation may approach the bond holder with a plan to revise the payment schedule, or make arrangements to pay off the interest by a certain future date. In either scenario, the company will be considered in arrears until the interest payment has been paid in full to the bondholder.
In a similar scenario to the mature bond, stocks yield a return and dividends are paid to the shareholders on a recurring basis. When a company fails to make a dividend payment on time, then the amount of the payments is considered to be in arrears. As with the bond issue, companies may ask shareholders to work with them to accept an alternate payment schedule for the dividends. Once the payment schedule is in place, and the shareholder has received that first agreed upon dividend payment, the company is not considered to be in arrears any longer.
In actual practice, it is not that uncommon for businesses to experience some sort of arrearage during the course of a fiscal year. Often, the causes of the state of arrears are innocuous matters, such as a delay in calculating the interest or dividends that are due. This sort of delay is usually resolved in a very short period of time, which means the state of arrears may be measured in days or weeks, rather than in longer increments of time.
Still, it is important to consider the frequency that arrearage occurs with a given corporation, as well as the average duration that a payment remains in arrears. Frequent slow payments to investors, especially if the payments take months to process, may be a sign that the organization is not as financially stable as it should be. While arrears do not automatically indicate a financially weak or irresponsible company, the state of arrears can indicate there are problems that may investment in the company an unwise move.
