S&A Dividend Grabber: “500-B Shares — Double Your Money”

By Travis Johnson, Stock Gumshoe, March 26, 2008

[regular readers: this originally appeared last week and I’m just correcting some bad coding, sorry for any confusion]

Can you really buy McDonald’s or Coca Cola for “pennies a share?”

Leaving aside the fact that “pennies a share” means nothing, of course (with enough pennies, you could easily pick up some of Steve Sjuggerud’s favorite St. Gaudens Double Eagles — though 100,000 pennies would put some stress on your pants pockets).

I’ve heard from many of you about the new teaser circulating for the Dividend Grabber service from Stansberry and Associates for so-called “500-B shares” so let’s take a look at it. You may have seen this as 500b or 500-B, or seen them called stocks or shares, but it doesn’t really matter (they just made the term up, as far as I can tell).

The teaser is from Sean Goldsmith, who I guess is the editor of the S&A Dividend Grabber these days. Those of you who’ve been around Gumshoedom for a while know that I’m not all that crazy about these dividend grabbing strategies as the basis for a portfolio, though they can occasionally work over the long run as long as you’re not just “buying the dividend.”

In the past I’ve heard from several readers who were frustrated with this particular service because I guess it changed quite a bit in its first year or so, altering strategies about when to buy and sell around special dividends. Hopefully they’ve got a good strategy in place now. The last time I looked at this one was when they were recommending Palm for its special dividend, which would have sunk you (at least so far) — so that lesson is: the company still matters, special dividends aren’t great if the company isn’t also at least somewhat promising.

“Buying the dividend”, by the way, just means buying a stock in time to get the dividend payment and, if you’re like some people, selling it immediately afterward. Some versions of this strategy can be effective, on average, but unless you’ve got tons of money and like paying high taxes it can be easier to have a manager do it for you — that’s what we looked at with the “dividend doubling dynamos” a while back. Not that those ideas or investments are ideal, either, just other options to consider.

But here we are and I’ve not yet addressed this particular teaser. It’s for a special kind of shares made available by America’s best companies, shares that are generally much cheaper and, in many cases, have more growth potential, especially over the short term.

Among the examples given are McDonald’s, which issued 500-b shares on January 25, 2006 and saw them jump 100% in 24 hours.

And Halliburton, which issued 500-b shares on November 15, 2006 and watched them jump 24% in one day.

Sound a little fishy? Nah, that’s just your skepticism talking! Come on over here to the corner and the Gumshoe will whisper the secret in your ear …

Ready? HEY MAN, WE’RE TRYING TO HAVE A PRIVATE CONVERSATION HERE!

Sorry … I think we’re alone now. 500-b shares, I can only tell you because I know you’ll promise to keep it on the down-low, are …

Spinoffs.

Yeah, pretty sexy, huh?

McDonald’s spun off a portion of it’s holdings in Chipotle on that day back in 2006 in an IPO. Halliburton did the same with KBR.

And all the academic papers and citations that back up this secret strategy from the “Dividend Grabber?” Well, that’s all pretty well grounded, too. On average, spinoffs do outperform the broader market.

Folks have speculated that there are several possible reasons for this:

1, that spinoffs can perform better when they can make their own decisions, without having to please a corporate parent who may or may not be in the same business.

2, that parents price spinoffs, when they do sell them as IPOs (instead of dividending the shares out to their own shareholders), fairly nicely to start because they want to get lots of happy share holders and drive the price up (in this case, parents often hold on to a majority of the shares for a while and slowly sell them off).

3, investors often have a chance to buy these cheap, because institutional investors often aren’t interested in the small spinoff and sometimes aren’t allowed to hold it, depending on their guidelines. On the same tack, analysts don’t often cover these companies right off the bat, and the analysts of the parent company might just be happy that dropping the distracting subsidiary will help the greater cause, so the shares can often stay under the radar for a while (not Chipotle, but sometimes).

and 4, that these are simply smaller companies, and smaller companies on average typically