“Wall Street Bonus Checks”

By Travis Johnson, Stock Gumshoe, September 28, 2007

This is a post I sent out a few months ago, around the time of the launch of the Dividend Grabber service — it used to tease a “$9000 one day payout” and now teases “Wall Street Bonus Checks,” but the main stock teased is still the same one, and I’m just adding this note at the top and a quick one at the bottom to update things. Haven’t changed the stuff in the middle, even the parts that might be out of date.

Here’s the original post, from June 16:

Here’s one from the Stansberry folks, actually from Porter Stansberry himself as an ad for the S&A Dividend Grabber service. This is a somewhat odd investment advisory that tries to trade around special dividends for fun and profit. It’s $1,000 a year, which strikes me as kind of high for what is essentially a mechanical advisory (buy the stock, get the dividend, hold for a better price, sell). But that’s just me.

And they’ve got a few in their sights — the ad mentions the ones that they have apparently successfully negotiated during the first six months or so of the service, including Potlatch, TD Ameritrade, and several others. The general idea is that you get in in time to get the special dividend, pocket that cash, then hold on for 3-6 months to get additional capital gains.

Stansberry claims that this has been validated as an approach that “almost always” works based on five years of data back-checking, with “nearly all” of the companies that issue special dividends returning to their original share price within a year. Of course, you may have noted that the last five years has been a pretty remarkable bull run for dividend stocks and stocks in general … so whether it works forever, who knows.

But more to the point, he’s got one in mind that’s shortly going to be issuing a 51% dividend — not bad!

(As you’ll see in a minute, it’s actually kind of a strange and complicated story involving private equity and taxes, too, but there is genuinely a big special cash dividend.)

So what clues do we get about the specific company he has in mind?

“electronic-device company that’s paying out a 51% ONE-DAY special dividend.”

“The only catch: You have to become a shareholder very soon”

“a private equity firm has just agreed to buy a 25% stake in a company that makes electronic devices. The secret deal includes a plan to pay out $940 million to shareholders of the company.”

So, this is a pretty anomalous transaction, so that should be enough to find it.

And what do you know, it is!

This company that’s going to be issuing a special dividend is …

Palm, Inc. (PALM)

In case you didn’t hear earlier this month, Palm has agreed to what they call a “recapitalization” (their press release is here). This is kind of a wacky one, because it involves Elevation Partners (Bono’s private equity fund … which I think means you have to sing the “E-le-va-tion” part, and hold up your lighter) and a partial takeover. News of that sent the stock up from around $16 to $18, though it’s now back down a bit at $17.50 or so.

Essentially, Elevation is putting in a big pile of money through a convertible offering, but before that conversion Palm is special dividend-ing out roughly half of the company’s market cap in cash to shareholders … using Elevation’s money and a lot of debt. Apparently this has tax implications, as it allows Elevation to control a greater portion of the company without putting up that greater portion of the capital or paying taxes on it (or something like that). I must confess to getting confused because this is too much like multiplying fractions, an horrific elementary school memory that still gives me the night sweats.

But there are plenty of folks who can actually explain it — one is Philip Frank at Insight Capital Management, FYI. Hopefully you’ll read that, comprehend the situation, then come back here and join the rest of us.

So anyway … there really is going to be a special dividend, you really will get the $9 in cash if you pick up Palm shares now (assuming the deal is approved by shareholders, not sure when that vote might be). They expect to close the deal sometime in the third quarter, so fairly soon. When it’s over, you’ll still have shares in Palm, and it will be essentially the same company, just with a share price that’s roughly $9 lower on the ex-div date than it was on the day before, lots more debt, and a new large shareholder.

Stansberry’s service is in essence betting that over the next six months or so the shares will climb significantly above (today’s price-minus-$9), whether because of the pressure of Elevation Partners or new device introductions or cost cutting or any of a number of other reasons.

Now, whether or not Palm is going to get clobbered by Blackberry and the iPhone … that’s another matter, though probably a more important investment consideration in the long run. I happen to use a Treo 700p and like it, so I may be biased on that front. Plus, I secretly (and probably wrongly) think that the iPhone will end up being a commercial flop, at least in comparison to the numbers the more optimistic AAPL analysts are currently throwing around. That puts me outside the consensus, to be sure, especially because I’m otherwise an Apple fan and Mac user.

Back to the point … S&A’s Dividend Grabber thinks that you should be able to pick up shares — presumably now, or maybe after they announce the ex div date — and get both the dividend in the next few months and some capital appreciation in the months to follow. I don’t know if that’s true, but I do know that the company Stansberry was teasing in today’s email with the 51% dividend is Palm, Inc., and that info won’t cost you anything … let alone the holy cow $1000 that Stansberry is charging for this service.

I’ve heard from one reader who actually subscribed to this service a month or two ago, and was quite disappointed in it (for much the reason you might be thinking right now — special dividends are almost always well publicized, so anyone paying attention could follow essentially the same strategy for free). It’s true that it sounds like a nice, easy, mechanical service though, and one you probably don’t have to think about — you’re told what to buy, when to sell, it’s all short term, and that’s it. It’s new, so maybe they offer something more than what I’m seeing here, but if anyone else has info on special dividends or on this S&A Advisory, please feel free to share here or in the forum.

Have a great weekend, Gumshoe readers. And remember, the Gumshoe accepts special dividends anytime, no questions asked.

And more September comments/updates: Palm did end up approving their interesting refinancing plan, so we’ve got Bono on board now and that dividend will definitely happen … and most people probably noticed that they introduced a potentially important $99 Centro smart phone yesterday, which gave the shares a big boost. They also both introduced and canceled the idiotic Foleo “product without a market” during those few months, for those who are keeping track.

The share are still down from when they were first teased for this service, but not as badly as they were a couple weeks ago. In other updates that don’t matter, for full disclosure I sold my Treo because it drove me batty with it’s unreliability, and got a Blackberry that works much better — so will the Gumshoe’s defection be the death knell of Palm? I was a Palm user for years and I really prefer their stuff, but it’s been a long time since they introduced something that was anywhere near problem-free. For their sake, I hope this new phone or the new Treo 750 will be the magic bullet. But I’m not putting my money on them here.

Palm thinks this deal with Elevation Partners will close by the end of November, and they are “confident” that they will be able to find buyers, even in this tight corporate debt market, for the $400 million in debt they need to sell to make the dividend happen. So I imagine the special dividend will take place sometime between Thanksgiving and the end of the year, but that’s just a guess — I’m not aware of any specific dates for the dividend having been released yet. And of course, if it’s like most special dividends it will be in itself meaningless — $9 in your pocket in exchange for a $9 cut in the share price. It’s what Palm manages to do to goose their share price after the dividend that will really matter for the Dividend Grabber strategy … and on that, your guess is as good as mine.


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16 Comments on "“Wall Street Bonus Checks”"

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Anonymous
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Anonymous
June 17, 2007 7:37 pm

Tanks, thatwas quick!!
Ireceived the e-mail only on Jun 15th
RegardingS&A service,
I bought their first recommendation: Altana AG at $61.00 before the div
Today: OTC: AAAGY it’s trading at $24

hedy1234
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hedy1234
June 17, 2007 7:59 pm

The Dividend Grabber concept is based on buying the shares POST dividend based on the idea that the underlying stock is strong and while rise somewhere near the original price before the special dividend.

It is not an “automatic” service as there have been a number of special dividends that have been delcared that the service does not recommend buying into.

Anonymous
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Anonymous
June 17, 2007 8:34 pm

okay, i got a special div. last year on general maritime ( gmr ) and a few weeks after ex-div. date, the day of the payout date it dropped by about the amount of the div. and has stayed their ever since. my question is this: can I sell between the ex-dividend date and the pay out date to capture the dividend and still sell the stock before it drops by the amount of the dividend after the payout date?

One Guy
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One Guy
June 18, 2007 1:29 am

As far as the S&A service goes, I thought the ad was pretty specific that you buy in time to get the dividend, then hold from there for the gradual price recovery. If that’s not actually what they recommend I’m a little surprised.

And on the question re: GMR et al, I’m afraid there really is no way to work the dividend dates to get a free lunch, the ex div day brings the nearly automatic price drop, the actual payment date generally doesn’t bring any price action (except maybe a tiny boost from folks reinvesting the div.).

Anonymous
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Anonymous
June 24, 2007 7:57 pm

seems like one just gets part of their investment back in the early dividend that will be taxed so you would be out the tax impact of the dividend!

One Guy
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One Guy
June 24, 2007 8:51 pm

Actually, my guess is that Palm isn’t going to be profitable this year, which would mean it was a return of capital — not a taxable dividend, it just reduces your cost basis. I could be wrong on that, but that’s my understanding.

scriblrr@aol.com
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scriblrr@aol.com
June 27, 2007 3:47 am
Hi, SG: It’s scriblrr, the chastened dividend grabber. As I reported awhile back, the dividend grab went through a retooling from the time Porter S. first released it. While it SOUNDS like they’re gonna tell you when to “grab” the big $$$, they SELL you on waiting ’til the EX div date (when the stock sells at a discount equal to the dividend paid). The reason is that IF you grab the div, then sell the stock before the EX Div date, you will get a “due bill” from your broker later that takes back the dividend! Net=net: there is… Read more »
Anonymous
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Anonymous
September 29, 2007 2:05 am

If the stock has an automatic downside correlating to the dividend,one might analze whether buying a put, selling the stock short or similiar techniques might net more money. This way you dont participate in the risk of the stock coming back to par months later.GI

One Guy
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One Guy
September 29, 2007 2:54 am
Interesting ideas, but unfortunately not really possible with big special dividends, at least if I understand you correctly. Short sellers owe the owners of the stock they’ve borrowed a cash payment for any special dividend or regular dividend paid while they’ve borrowed their stock, and puts are generally adjusted for any special dividend that’s more than about 10% of the stock price to make it a non-event for option owners (calls too, of course). Apologies if I misunderstood your strategy, but of course any kind of arbitrage around a special dividend is already being played by institutional investors and hedge… Read more »
HelicalZz
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HelicalZz
September 29, 2007 3:54 pm

If I wanted to participate in a dividend capture stategy – I’d save the newsletter subscription price and instead put those $$ into one of the Alpine closed end funds.

http://www.cefa.com – then search Alpine.

Zz

Anonymous
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Anonymous
September 29, 2007 6:23 pm

My understanding of options is that they have no right to participate in the dividend and their premium is reflected by volatility and time.I dont understand your reference to “adjustment” to make this a nonevent. If you sold short at $60 and the stock price was $50 after the dividend,when the brokerage buys the stock back,how does giving the dividend to the original owner reduce the $10 gain on the short sale? GI

Anonymous
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Anonymous
September 29, 2007 7:25 pm

After reflection on accounting for the borrowd stock,the adjustment makes sense because the brokerage is accountable for the dividend to the originable owner of the stock. But,there is no such mechanism on the options market that I have seen reference to in all the books I have read.If you can give me a reference to adjustment for dividends on the option market, I will read it. I am always the student. GI

One Guy
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One Guy
September 29, 2007 7:58 pm
Regular dividends don’t change options contracts, but things like splits, major special dividends (again, that “10% of the share price” is the guideline I’ve been told about over the years) do adjust the share price. So you’ll see that some contracts are for 200 shares instead of 100 if there was a split, for example, or for 100 shares plus a cash payment if there was a big special dividend. And if you sell shares short, the way that works is that you have to borrow the shares to sell them. The person you borrowed them from is expecting their… Read more »
Anonymous
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Anonymous
September 29, 2007 8:49 pm

I appreciate the info, because a split would cause an option adjustment(2 for one etc).It still seems a put option would be viable to take advantage of of regular or special dividend payments because they do have an effect on the share price which is a component in the premium of the option, absent a split.GI

One Guy
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One Guy
September 30, 2007 1:01 am
Here you go: http://www.cboe.com/LearnCenter/Concepts/Beyond/general.aspx And here’s a pretty decent article that explains how this works, using a recent high-profile special dividend, the big one-time dividend from Microsoft a couple years ago: http://www.thestreet.com/options/stevensmith/10175579.html Again, to be clear: regular dividends do not change options contracts but do mean short sellers owe the dividend; special dividends over a certain threshold (whether share dividend or cash dividend) DO cause options contract adjustments and an obligation for short sellers. The key thing to remember is: None of us are so smart (no offense) that we’re going to find out a free way to make money… Read more »
Anonymous
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Anonymous
September 30, 2007 1:56 am

I agree with your last remarks. If the loophole exists, I am sure better minds than mine have found it. I am primarily a forex trader. But the ultimate test lies in the market. Creative trading should always be paper traded. When you stop learning or thinking with the tools the market gives you, you limit your ability to make money.GI

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