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 …


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 …


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 outperform — and perhaps the fact that they have the benefit of a larger company’s finanical acumen will help them (or not).

The last part of the teaser is that there’s a particular company he has in mind for his next recommendation:

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“I’ve just uncovered another potential offering of “500-b” shares by one of America’s most well-known consumer goods companies. This $147 billion corporate giant recently filed preliminary paperwork with the SEC, and could offer the shares as early as April 15, 2008.”

That one, should you be so inclined to start investigating, is Altria. They’re spinning off the Philip Morris International division sometime this Spring. That’s not one I would buy so I haven’t looked into it, but feel free to share here if you do so and feel like expounding.

As for the idea of the “500-B” shares, I’m not sure what they’re talking about, frankly, or if they simply made them up. Usually these invented terms have some basis in the filing numbers, SEC regulations, or facts, but I haven’t dug that deeply to discover what basis that might be. There are a couple possibilities that come straight to mind: Firms are generally only required to file with the SEC, whether or not they’ve gone public, if they have more than 500 shareholders (which is partly what spurred the Google IPO to take place when it did); and this could simply be a reference to the S&P 500, as in the “B” shares of these big S&P 500 companies. Or maybe you’ve got a more sensible idea, which I’d love to hear.

Generally, firms will certainly announce a spinoff no matter how they do it, but as I understand it there may not be a special filing required if the spinoff is simply done by dividending out shares to current shareholders, often also called a “carve out.” I might be wrong on that.

If the spinoff is done through an IPO, an offering of the subsidiary’s shares to the public, they should be required to file much the same kind of prospectus as any other IPO — generally that would be an SEC form S-1 filing, which is explained in pretty good detail here by Hoover’s if you’re interested. You can certainly search for S-1 filings through Edgar on the SEC website (use the advanced search, specify form S-1, and add keywords like spinoff or “spin off” to narrow down your search). Mostly, the significant companies that are talked about in this teaser and that are likely going to be covered by the newsletter, if the teaser is any indication, are also going to get pretty heavy press coverage, so I wouldn’t worry much about “missing out.”

So … Short answer: Spinoffs are often good in the long term, and the spun off company usually outperforms. But do note, “often” and “usually” are hard words on which to base individual stock purchases — so I hope it goes without saying that further research into these companies is always a good idea, whether they’re spun off directly to shareholders like Philip Morris International will probably be, IPOd into the market piece by piece like Chipotle, or otherwise freed from the shackles of Mom and Dad.

Happy Investing, all.



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