“American Steel Pays $6,528 in ‘Liberty Checks'” sez Ian Wyatt

by Travis Johnson, Stock Gumshoe | April 12, 2018 4:57 pm

Those "American Steel" payments are done now... What's the next "Liberty Check" coming in a couple weeks?

This pitch sounds quite familiar, and there’s a good reason for that — Ian Wyatt[1] last year pushed quite hard on a favorite special dividend play… and this initially looked like a repeat of that, because the company that paid a huge special dividend around Thanksgiving last year is again paying one right now.

How’s that for a tease? Have no fear… we’ll explain.

The email from Wyatt calls these special dividends[2] “Liberty Checks” — here’s a little taste of the ad:

“In early March, President Trump announced tariffs on aluminum and steel.

“In anticipation of that move, one key supplier to America’s steel industry made its own headlines:

“The company would send out its second ‘Liberty Check’ payment in just six months! And investors who raised their hand had a shot at collecting $2,403.”

And apparently that $2,403 didn’t sound impressive enough, because in the next paragraph they boost it:

“Collect Your $3,360 Liberty Check on April 27

“Americans are getting rich with these special payouts! These secret payments could total $3.1 TRILLION in 2018. Act now to cash in the next ‘Liberty Check.’

“Your check for $3,360 goes out on April 27. Just confirm your details to claim your payment.”

We should be clear: Whether you call it a “Liberty Check” like Ian Wyatt or a “Freedom Check” like Matt Badiali[3], or even a “Trump Bonus Check” like Mike Burnick[4] at Infinite Income[5] (I haven’t covered the details of that one yet), these are not “free money.” They aren’t “hidden benefits.” They aren’t government largesse… these are dividends and distributions to shareholders, which means you have to own part of the company to collect your share of the money. And to collect the large amounts these ads hint at, you have to own a pretty big part of the company… again, there we go with the “it takes money to make money” rule.

So get the idea of “checks” out of your head, since that apparently inspires people to daydream about free money, and think about these as investments. Meaning, your money is at risk. Sometimes with a capital “R.”

What else do we learn about this investment?

“Back in November, the company announced its first-ever Liberty Check payment. And it was huge; regular folks were able to collect $4,125….

“… it’s an Alabama company that mines for coal[6]. Now, this isn’t the dirty coal that’s used to make electricity.

“Instead, this coal is used in furnaces that are used to make steel. And with the steel industry experiencing a resurgence, business is good.

“The company’s revenues jumped 133% last year. And it turned around its poor financial performance, swinging from a $50 million loss to a $455 million profit.”

Alrighty then, so yes, we know that this is a reference to Warrior Met Coal (HCC)[7], which paid a special dividend in November and will pay one again this month… but there’s a twist, because the stock is already trading without that April special dividend (if you bought the stock yesterday it would have cost you about $30 a share… when trading started this morning, it was around $23 a share and your dividend payment of $6.53 was “in the mail” and scheduled to arrive on April 20).

So Wyatt isn’t pitching HCC again this time, though it did fairly well following the special dividend last time around… that ship has sailed.

You can see my story about that past HCC special dividend here[8], both that dividend and the one that’s payable to shareholders as of yesterday are essentially a way for the big investors to get their cash out of the company — HCC came out of the Walter Energy[9] bankruptcy fairly recently, and management has been loading them back up with debt again and using that borrowed money (and the tax loss carry-forwards) to post pretty impressive early results and pay special dividends[10], allowing their controlling shareholders to get a lot of their cash out of the company without giving up any shares.

I didn’t find the investment appealing because the company wasn’t particularly appealing… though it’s certainly possible that they’ll get a tailwind from selling metallurgical coal to US steelmakers if steel production in the US soars as a result of the planned tariffs (it’s also possible that prices for metallurgical coal will drop if HCC’s foreign buyers stop purchasing it from the US… it’s hard to say how it will go, but HCC exports most of their coal currently). It has done well so far, folks who bought shares back when I wrote about Wyatt’s pitch on November 9 would have paid about $26, and will now have received special dividends of roughly $17.50, so their cost basis will be down to $8.50 and the shares are still close to $23. That’s not bad, though I don’t know what the tax treatment of those special dividends will be (if they are “return of capital,” they just reduce your taxable cost basis… if they are “income,” they are taxable as either qualified or unqualified dividends).

But anyway, I was afraid that Wyatt was pitching this second dividend payment on a day when it has already been made — thankfully, that’s not the case, today he’s got something else to promote.

He says that this next “Liberty Check” will pay out on April 27, and that he’ll be hosting another “exclusive briefing” on April 19th to discuss it.

So what’s that next one going to be? There’s only one special dividend of meaningful size that’s going to be paid out around that time, so the Thinkolator sez he must be hinting at… Changyou.com (CYOU)[11].

Changyou is a separately listed subsidiary of Sohu[12].com (SOHU), and is a developer and operator of multiplayer online role-playing games in China[13] (a huge segment of the entertainment economy there — also a major driver for Netease (NTES) and for larger and more diversified companies like Tencent (TCEHY)). It hasn’t recently been growing much, and the stock has therefore been fairly moribund — at least, compared to the darlings of Chinese tech.

And that relatively low valuation probably bugs Changyou’s Chairman, Dr. Charles Zhang — who is also the founder (and CEO and Chairman) of Sohu, which owns a bit more than 2/3 of CYOU. Zhang made a “go private” offer to take over Changyou last spring at $42.10[14] cash per US ADR, and reiterated his interest in making that deal in February.[15] The shares did briefly crest above that $42 offer level last summer, then CYOU missed earnings estimates when it reported in January[16], at a time when lots of stocks were falling, and it dropped to $27 or so. News of this special dividend, announced on April 5[17], has helped to support the shares a little bit, and they’re now back to about $30.

The dividend will be paid to “record holders” at the close of business on April 20, though that shouldn’t be the ex-dividend date — large special dividends are treated differently, and it looks to me like the shares will trade ex-dividend only after the dividend has actually been paid, so those who buy the shares up until April 26 should receive the $9.40, with the shares trading ex dividend (that just means “without the dividend”) on April 27.

Does that make this appealing? Well, that really depends on what else happens in the future — this special dividend could make it perhaps a little cleaner to do something with CYOU shares, like let the Chairman take them private or find some other buyer, but it does also indicate that they don’t have anything particularly compelling to do with the cash. CYOU is overcapitalized, with almost a billion dollars in cash and about $400 million in debt, so they can easily afford the $340 million for this special dividend.

The company was really built on TLBB, as I understand it, a game that is getting pretty old now but remains quite popular, including the “Legacy TLBB” mobile game that’s a bit newer. Online gaming continues to represent about 80% of their revenue (the rest is mostly advertising), so if they continue to be independent they’ll be driven by their ability to make new hits and keep gamers happy.

They did post a drop in income last year, but that was mostly because they took a writedown on the value of MoboTap, a company they acquired in 2014 for its mobile browser (called Dolphin). They are guiding first quarter revenue to be quite similar to the first quarter of last year, so that lack of growth and the lack of clarity about whether they’ll ever be able to meaningfully grow in this competitive space is probably why the shares trade at a valuation that seems ludicrously cheap compared to other Chinese tech stocks — they have a trailing PE of about 15, and there aren’t many analysts covering the stock but they forecast $2.90 for next year’s earnings, so that’s a forward PE of about 10.

The earnings won’t be impacted by the special dividend, so if analyst estimates stay the same they could soon be trading in the low $20s with a trailing PE of 10 and a forward PE of about 7 (The “E” stays the same, but the “P” will drop by the amount of the dividend payment… at least temporarily). That’s obviously cheap, particularly for a high-margin business like online gaming, so clearly investors are expecting either a continuing deterioration of earnings or they’re expecting Sohu and Zhang to take the stock private without paying a huge premium. Or maybe there’s some skeleton lurking in there that I’m unaware of, or folks just don’t want to deal with the minnows when Baidu and Tencent and the other big guys are getting all the attention. I don’t know.

But on that basis, it’s relatively appealing if you like trying to trade around these special dividends — Changyou isn’t getting much credit for its huge cash hoard as it is, so it may well not hurt the shares once that cash has been paid out. The hope of special dividend enthusiasts is that they can buy before the dividend, collect the dividend, and then also hold through the subsequent few months and watch the stock gradually recover to close to its prior price. And that happens sometimes (it happened with Warrior Coal, for example), particularly if the underlying stock is at all appealing and has some reasonable valuation or growth to entice new investors following the dividend, but it’s certainly not guaranteed.

So with that, I’ll leave you to ponder — interested in Changyou and that special dividend? Think it will generate strong returns for you? Will Chairman Zhang’s buyout offer continue to stand at $42 (or a dividend-adjusted $33.50ish)? Will Changyou develop some new game that sets the world afire and rejuvenates growth? Is there some ugliness here that I haven’t noticed yet?

I don’t know the answers, but those would be the questions I’d be asking myself before speculating on this one. If you’ve got an opinion to share, shout it out with a comment below.

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