Get Your “Unclaimed Dividends” like the “DC Elite”

by Travis Johnson, Stock Gumshoe | June 6, 2011 11:13 am

Identifying a high-dividend foreign stock teased by Currency Capitalist

This teaser throws out hot-button political names to get us excited — and unlike many folks who stick to provoking investor ire by only mentioning liberal democrats, they make sure to offer equal opportunity in poking those hot buttons …

“Dozens of DC Elite, from Mitt Romney to Nancy Pelosi to Ron Paul Are Earning up to $27k/month in ‘Unclaimed Dividends’

“Here’s how you could tap this privileged income-stream and receive your first check by June 30th….

“It’s outrageous!

“High-ranking government officials have got it made. On top of their salary… they get generous perks, pensions and healthcare[1] benefits in excess of $69,192 each year.

“But there’s something else this ‘privileged’ political class is getting away with. And while it may infuriate you… it could ultimately help you pocket an extra $917 to $1,834 a month, maybe more.

“You see, we recently uncovered a little-known ‘unclaimed’ dividend program that D.C. elites use to quietly rake in a substantial side-income.”

Many of you know that until about a year ago Stock Gumshoe was based in DC, in stately Gumshoe Manor (that was before our move to beautiful Gumshoe Mountain here in the wilds of Massachusetts), but although I can almost be certain about the fact that I have used this “unclaimed dividend” strategy myself, your favorite Gumshoe sure ain’t (and wasn’t) a member of the “privileged” political class. Except that I did vote, despite the fact that DC residents still get “taxation without representation” (yes, it still rankles even though I no longer call DC home), and voting does, embarrassingly enough for our country, put you in a “privileged class” of people who make even a limited effort to participate.

But anyway, we’ve seen this general sort of pitch before — the “in crowd” is using their special privileges to invest in a particularly profitable way, so, dangit, why don’t you subscribe to this letter so you can do it too? The newsletter this time around is one of the ones from the Sovereign Society folks, called Currency Capitalist[2], which seems to be run by Sean Hyman[3].

Part of the pitch involves teasing several investments that can get you these “unclaimed dividends[4]” — and I’ll get to some of those shortly — but the underlying idea of this investment is such an odd stretch that I have to dig into that first.

What are “unclaimed dividends?” Well, it’s an appealing sounding term (haven’t you seen the ads about finding unclaimed money that the government owes you, or that a long-lost relative meant you to have? Same basic idea, getting “free money” is the most appealing pitch we’ll ever see), and a term that has been used for other newsletter ads in the past … one that comes to mind is Jeff Clark[5]’s “Unclaimed Dividends” from a few years ago.

But that was a tease to get you hyped up about options[6] trading — this is something much more like, well, plain old dividends. Here’s how they describe the history of these “unclaimed dividends,” a history that they trace back to what most folks consider was the first publicly traded company, the Dutch East India[7] Co. in the early 1600s … here’s that spiel:

“The Dutch East India Company was granted a legal monopoly on trade routes between Europe and India.

“But it still didn’t have enough money to cover the huge expense of dispatching tens – ultimately hundreds of merchant ships halfway around the world.

“So this company’s president, Jan Pieterszoon Coen, came up with a unique kind of income pool – that allowed regular investors to own a piece of the company, in exchange for a giant slice of the profits.

“Participants in these income pools earned an average yield of 21%. Not for a quarter or two… but for 180 consecutive years!

“At that rate, a single $1,000 stake would grow into a $796 million family fortune.

“These are the same type of pools that Washington’s elite from Dick Cheney to Ron Paul to Chief Justice John Roberts are tapping each month.

“But what makes them so lucrative – and completely unlike regular dividends – is, these payouts automatically adjust higher as the U.S. dollar loses value.

“Considering how the greenback has plummeted since the year 2000, it’s easy to see why some experts are saying, “this new source of income could be a godsend for millions of people on a fixed income or approaching retirement[8].”

“Despite this program’s documented success, most Americans are not aware these payouts exist, so they don’t pursue them. That’s why billions in dividends go ‘unclaimed’ and revert back to their source each year.”

So what are these “unclaimed dividends?” Well, in short, it sounds like they’re … dividends. You know, the regular kind that you get when you own shares of a company that chooses to share its profits with shareholders.

And what’s with this “unclaimed” business? Well, as far as I can tell these dividends are unclaimed by US investors because … they haven’t bought the shares and therefore “staked their claim” on the dividends due to shareholders. Somewhat odd, since I thought this Currency Capitalist newsletter was focused on actual currency trading, but it appears that part of their strategy is investing in foreign stocks as well (not that I think this is a bad idea).

There’s a chance that the Currency Capitalist folks are pitching more complex strategies to generate income from these ideas, but from the Dutch East India reference and the basic clues given for each specific pick, and the fact that at least some of those picks are for stocks that don’t offer options trading, it sounds to me like we’re just talking about their regular corporate dividends.

Convoluted, no? Well, it’s obviously a silly tweak to get you revved up to buy their services … but, as we are wont to do here at Stock Gumshoe, we will look beyond the silliness of the sell and try to figure out exactly what investments they’re pitching. After all, good ideas can come from anywhere.

So what are the “unclaimed dividends” that they tease? I’ll look at the first one now, and try to get to some of the others in a future piece — the clues are not particularly abundant but, as always, your friendly neighborhood Gumshoe will rev up the Thinkolator and do his best.

Here’s the spiel for “unclaimed” number one:

“’Unclaimed’ Dividend Pool #1: $63.5 Million
“Your Expected Payout: $3,860

“This Mediterranean income stream gives you a direct cut of revenue from 3 million cell phone subscribers. It’s only been offered since 2001 and has already paid out hundreds of millions of dollars. But here’s the incredible thing…

“It’s continuing to grow at such a rapid clip, some investors have seen payouts spike nine-times higher in just a few years. And thanks to recent action at the top, this trend is sure to continue.

“A few months ago, the Board of Directors approved a policy to return 80% of revenue to anyone whose name is on their distribution list. By our estimates… that means another $63.5 million will be given away in the next couple weeks. And in just a few years, if history is a guide, this payout could jump from $63.5 million to $571 million!”

So hoodat? Toss the snippets into the Thinkolator and an answer comes out — can’t be 100% certain given these squishy clues, but this is very likely to be: Partner Communications (PTNR).

Partner is one of the three dominant mobile phone companies in Israel[9], and they do have about three million subscribers — I think they’re still the second largest of the three companies in terms of number of subscribers (the others being the slightly larger Cellcom (CEL[10]), which we’ve written about before, and the slightly smaller Pelephone, which was the first major provider but is now owned by Bezeq (BZQIY)).

Partner is the operator of the Orange-branded mobile network in Israel, and from what I can tell it’s generally considered the top player in terms of network quality and advanced features among the three — it arguably has more of a focus on smart phones and next generation services than do Cellcom and Pelephone, and seems to get better revenues per subscriber. Like Cellcom, Partner is a high yield[11] stock — Cellcom routinely pays out 95% of income as dividends (though I think their mandate is only to pay out at least 70%), and Partner does indeed have a mandate from the Board to pay out 80% (they paid out 98% last year). That decision is not a new one from the Board of Directors, so it’s a little bit disingenuous to say they approved it “a few months ago,” but it is something that they have routinely re-approved, including for 2010, so I suppose they probably did technically approve it “recently.”

All of the Israeli mobile telecom companies look absolutely dirt cheap based on either trailing or forward earnings — CEL and PTNR both trade at about 7X last year’s earnings and 2.5X next year’s estimated earnings. That’s a bit of a red flag, since obviously a strong and viable business should trade for more than twice what they’re expected to earn in annual profits — in part the concern is debt, since both companies carry pretty heavy debt levels, and in part there’s concern about whether subscriber growth can continue in a saturated market (though that’s not unusual for a telecom firm), but the larger concern in Israel is a major revamp of the regulatory environment.

The government started to require cell number portability a few years back as a bit of a shot across the bow to spur more competition and reduce costs for consumers (not unlike what happened in the US seven or eight years ago), and changes going into effect this year are expected to force still more competition — including reductions in cancellation fees and an increase in the number of licensed mobile operators. There’s a good article from December on the basic regulatory outlook and competition concerns here.[12] More importantly, the government this year is also cutting the interconnect tariff that these companies can charge for connecting outside calls to their networks (ie, a landline caller connecting to a Partner cellphone) — this is something that all the companies involved has disclosed will have “material adverse effects” on earnings, the cut is about 72% this year, and the fee will continue to be cut by much smaller amounts annually to get to a total overall cut of about 80% in a few years.

You can see the basic response from the company to the regulatory changes, and the impact on their profitability, in the latest quarter — the press release is here[13], and the conference call transcript is here[14]. You can also see their latest presentation for investors here[15], though that only incorporates 2010 numbers (it does include some general background on the changing regulatory environment, too).

So that, combined with the fact that Israel has an extremely mature mobile phone market with very high penetration (ie, growth has to come from additional services or beating out competitors, not from brand new mobile subscribers), helps to explain why PTNR is cheap. Throw in their debt and the fact that the business is entirely in, well, Israel, and they could obviously be impacted by major political or military events, and you might even say that it’s reasonable that they’re this cheap (or that they should be cheaper still).

That’s a call we’ll all have to make on our own — I’m not thrilled about their slightly larger competitor Cellcom, largely because they’ve historically been more of a low cost provider and they seem to have entered this era of intensified competition with some bad press about outages, which is a tough way to keep customers, but Partner looks like it might have some appeal. It really depends on how you think the market will shape up, but I like that Partner is focused on the higher end of the market with smartphones and data services where there might be more hope for higher retention and less “churn” of subscribers. And like Cellcom, Partner is diversifying into other telecom businesses — in Partner’s case, this was done partly through their recent acquisition of 012 Smile, a landline voice/broadband company that they expect will help to supply them with revenue growth.

We should be extremely skeptical of forward estimates from analysts for each of these companies, given that we’ve only seen numbers reported for the first couple months of this new regulatory environment and new mobile competitors will almost certainly come in with strong financial backing, but it’s worth remembering that investors almost reflexively overreact to new competition and sometimes fail to give the established dominant players enough credit — it’s really hard to unseat established business relationships, even if the regulatory environment gives you an opening.

And a 7% yield ain’t half bad (that’s annualizing the first quarter’s dividend of 39 cents, which is substantially lower than they’ve paid in recent quarters). My best guess for Partner would be that earnings will slip over the next year or two as competitors try various ways to win new business, and they’re certainly taking a hit from the interconnect fee, but I’d be more likely to bet on PTNR than on CEL … and I wouldn’t be surprised to see both CEL and PTNR lose some market share in the next year or two if attractive competitors with new mobile licenses get some traction, but that doesn’t mean that the marketplace won’t settle back down and allow for profitable and rational pricing after this first bit of upheaval.

It’s certainly contrarian to bet on Israeli mobile phone companies right now, which is often a good thing for your portfolio — but there is, of course, also plenty of reason to be cautious. I can almost guarantee that Partner will not show the same kind of growth in this next decade as they did over the past ten years, simply because everyone in Israel already has a cell phone and the population is unlikely to grow very much, so the tease that they might increase dividends by nine times in the coming years is probably a stretch … but that doesn’t mean they can’t be a profitable investment, sometimes you just have to choose whether you want a high current dividend or substantial future dividend growth. Of course, whether or not you “claim” your PTNR dividends by buying shares is up to you.

Oh, and if the Thinkolator is right about this one and you want that payout to equal $3,860 in the next quarter, you’d probably have to buy roughly 10,000 shares (the last announced dividend was 39 cents, and we haven’t hit the ex-dividend date for that payout yet) … which, at the recent price of $16.33, would cost you about $163,000.

I’m all for investing in dividend-paying foreign stocks — that’s a great way to get diversification of your portfolio away from the dollar, which is also a big part of the spiel for this newsletter … but you obviously face different risks in buying a relatively small and focused Israeli telecom company than you would in buying shares of a large multinational firm (Vodafone (VOD)[16], for example, has a current dividend yield not too much lower than PTNR — and a dramatically larger business across multiple countries, though they’re 50X larger and have plenty of challenges as well). If you’ve got an opinion on Partner or their competitors, feel free to share with a comment below.

Full disclosure: I own call options on VOD. I do not own shares of any other company mentioned above, and will not trade in any company written about for at least three days.

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