Ian Wyatt has been a fan of “special dividends” for some time, and has hinted at the huge potential payouts for his various investment newsletters over the years… this ad from him is in much the same vein, though he’s now selling a newsletter that is specifically focused on just these “special dividends.”
And, as the headline implies, he’s using the notion that there’s a 35% dividend just waiting for you if you subscribe — to be paid out in a matter of weeks. Who wouldn’t want that, right?
Well, “who wouldn’t want that” other than people who invest in taxable accounts, that is. People who have to pay taxes on their dividends aren’t always as delighted to get a big special dividend payout. More on that in a minute.
So what is it that Wyatt is really hinting at here? Let’s grab a taste of the ad for you:
“In the next few days, you have a chance to collect a historic 35% dividend from an American software firm.
“It’s just the beginning of what promises to be a record year for large, one-day payouts
“This 35% dividend yield will be payable to shareholders of record by October 3rd.
“At 35%, this dividend could hand you $350 for every $1,000 invested.
“That means a $700 dividend (in one day) from a $2,000 investment.”
They’re selling this idea in a special report called “Our Largest Special Dividend Yet,” though what’s really on offer is the subscription that you have to buy to get that “special report”… the new service, Dividend Confidential is edited by a guy named Steve Mauzy — I haven’t heard of him before — and it’s being launched with a “special” charter price of $795/year.
The general idea is that they’re going to recommend trades around these “special dividends” — either suggesting that you buy the stock in order to get the dividend, or that you buy it immediately after the dividend payment, when the stock falls, because of the tendency for those prices to recover over time (or both, I guess). Here’s how they put it:
“Depending on your tax situation, collecting a one-day payout might be advantageous – or it might not be.
“We’ve discovered that in some circumstances it can be even more lucrative to buy the stock on the ex-dividend date and to take your profits as pure capital gains….
“Here’s how it works:
“As soon as we vet a new payout, we send you an alert. At this point, you have two choices:
“You can look for yourself and see if the payout is something you’re interested in, buy the shares and collect the dividend…
“You can wait until after the ex-dividend date and take advantage of huge capital gains as the stock soars following the ex-dividend date.”
So that’s the strategy — what, then, is this “Largest Special Dividend Yet” that they’re pitching as they attempt to corral “charter subscribers?”
Well, we’ve already seen all the clues that are on offer — 35% dividend, payable to shareholders of record by October 3, American software firm.
So who is it?
This is almost certainly a fairly quiet US tech company called SynTel (SYNT), which operates as a technology services company to many major industry sectors, including healthcare and financial services. Syntel announced recently that they will be repatriating a little more than a billion dollars in cash from their foreign subsidiaries, spending about $240 million in taxes to do that (funded mostly by debt), and distributing the cash to shareholders in the form of a one-time $15 per share dividend (which is roughly 35% of the current $43 share price).
I don’t know this company, from what I can tell they have a lot of near-peers in IT outsourcing and services, but this is how they describe themselves:
“Syntel is a well-managed organization that has gained a reputation as a straight-talking, no hype firm that delivers consistent financial performance. With considerable cash reserves and revenues of $968.6 million in 2015, we have the financial stability to reinvest and grow with our customers. The stock trades on NASDAQ under the symbol SYNT.
“We are a global leader in digital modernization services, with a core suite of automation-driven IT and knowledge process services. Syntel helps global enterprises thrive in the Two-Speed World™ by building agile, efficient technology infrastructures that blend legacy business models with disruptive digital innovations.
“Syntel was the first US-based firm to launch a Global Delivery Service to drive speed-to-market and quality advantages for its customers. Syntel’s 23,500+ employees operate from centers in the U.S., Europe, and Asia.”
They’ve been around for 30+ years, they’re big enough to be considered a “mid cap” stock by many folks (market cap a bit over $3 billion), and this special dividend essentially amounts to them paying out all of their historical retained earnings to shareholders… at which point the company will no longer be “cash rich” (it will have hardly any cash at all, and will have some debt). That may not be a problem, since it’s not a particularly capital-intensive business (their assets are people, not big projects or buildings or factories), and it might even help the stock to get a better net valuation in the end.
It will hurt reported performance in the short term, however — the earnings for next quarter are going to be lousy because of the hit they’ll take on taxes as they “repatriate” that cash and distribute it. That doesn’t mean their long-term business will necessarily be hurt, that will depend on how the actual business operates — analysts seem to think, on average, that the stock is pretty fairly valued and not expected to grow much.
Analysts forecast that earnings will be down a little this year, roughly flat next year, and up a few percent in 2018 (not including the one-time hit from the special dividend), so that means the stock is currently trading at about 16 times next year’s earnings.
On the morning after the special dividend ex-dividend date passes, the shares will drop $15, so if they’re still at $43 then that would mean a fall to roughly $28… and at that point, with the earnings for next year not likely to be changed by more than a few cents (they won’t be collecting interest income on that cash, but that income was small and losing the cash doesn’t otherwise impact the business much), the forward PE will drop markedly.
PE ratios don’t account for excess cash (unless you do the adjustment yourself — like some folks have done for Apple over the years, for example), which is one of the main reasons companies consider special dividends: If they’re not getting credit for holding that cash, why not give it away?
So the earnings for 2017 will still probably be expected to be in the neighborhood of $2.60 per share. That means the forward PE, following the dividend, will be about 11 (assuming the share price will be about $28 following the dividend, $28/2.60 is 10.8).
Which means, if you do like the company, that it is now cheaper if you use the same metric that most investors do, that PE ratio. You could either buy it today at $43, get $15 returned to you in a couple weeks, and have a net cost of $28 (plus whatever taxes you owe on the special dividend, I don’t know what the tax treatment of it will be — sometimes these are all income, sometimes they’re partly “return of capital”), which would mean you own an IT consulting/outsourcing firm with a forward PE of about 11… or you could wait until the day the stock begins trading ex-dividend, buy it at the open for roughly $15 less than it closed at the day before, and also own that same share of that same company with a forward PE of 11 (and without whatever tax hit, if any, comes from the special dividend payment).
Now, whether that company deserves to have a PE of 11 or not is another matter. The forward PE has fluctuated between about 15 and 19 over the past year or so, and the trailing PE has ranged from 11 to 19 over the past five years. So you can make an argument that the shares should trade higher because that PE of 11 will be too low, and the market will gradually realize that and bid the stock back up following the drop caused by the special dividend… but even though the over-cashed balance sheet in the past may not have been a huge benefit for Syntel, you can’t be certain that investors will value the same company the same way when you take away that balance sheet strength.
And, of course, the big thing for Syntel in the years to come will be growth — can they grow the business? Can they take share from competitors? Those things won’t change much, but analysts are currently pretty skeptical about growth prospects.
The special dividend itself is really not magical, of course, and it doesn’t generate any big returns for you unless the stock really does recover fairly well after the dividend is paid. I wouldn’t expect to actually earn 35% on this investment over the next year, not unless you think that the stock is going to recover to $43 a share in relatively short order… but that’s a pretty high hurdle, and if you like the company otherwise it might be worth your time to investigate further. Most analysts rank it as a “hold,” and, since I don’t know anything about them other than what I saw from skimming a decade’s worth of financials (mostly slow growth), I’d be inclined to agree.
A PE of 10 or 11 for a slow-growth or no-growth IT services company seems pretty reasonable, and I don’t have any particular reason to want a one-time “kickback” of $15 for buying shares so I’d probably look at them after the special dividend and hope that there were a lot of shareholders who sold because they were just holding on to get that dividend… if it gets cheaper than that because of some over-selling, maybe I’ll be tempted. It could also run up in price heading into that special dividend, since sometimes those things attract investors like moths to a flame, so there could be quite a bit of volatility around the dividend payment date.
Here are the details from the press release:
“The special cash dividend, is payable on October 3, 2016, to shareholders of record at the close of business on September 22, 2016. Due to the size of the dividend, it is anticipated that the Company’s common stock will begin trading ex-dividend (without the dividend), the first business day following the dividend payable date, or October 4, 2016.”
So no, it’s not free money, and it’s likely not really a 35% return, but if the financial engineering works as they hope it will it might improve Syntel’s valuation… assuming the company is otherwise reasonably attractive to shareholders. They do not have a regular dividend and do not routinely buy back stock, and this is an expensive and one-time move… so if it doesn’t work or investors have no other reason, beyond the big cash pile, to buy Syntel shares, well, it could toddle along at $28-30 for a while after the dividend just like it has toddled around at $40-45 for most of the past couple years.
At least some other folks agree that the special dividend is a good thing — there’s a bullish article here at Seeking Alpha if you’d like to see some of that argument.
And, of course, Steve Mauzy and the Wyatt folks are pretty convinced that the stock they pick will do well after they pay their special dividend, this is how they describe the phenomenon:
“Once a company pays out a large dividend, the stock can rally for months afterwards.
“But right around the day of the payout, the stock typically declines in price.
“This exact price action happens with regular dividends too.
“And It’s completely expected. When a company has less cash, the price goes down similarly.
“it’s a market reaction – but it creates a powerful opportunity.
“That’s because when most investors are in the dark. They have no idea that exchanges have these rules in place.
“So most investors panic. They sell at the worst possible time…
“And because they don’t understand these special dividend situations, it creates a powerful tailwind for the stock. It shakes out all the weak hands and creates an attractive buying price for new investors.”
And they share a couple examples:
“Take a look at what happened with Advent Software….
“In 2013, this company paid a $9 a share dividend… and the stock dropped 37% almost immediately.
“But within a month, Advent regained that 37%…and even more.
“And our research shows in many circumstances, companies that pay large special dividends also have huge capital gains too…
“What we’ve learned is that collecting these dividends can be one of the safest and most reliable ways to make money in the investing world.”
Advent doesn’t exist anymore, it was bought by another financial services software company last year, but they did indeed pay a special dividend backed by both debt and cash back in the Summer of 2013 — the stock was around $33 when they announced the dividend, it spiked up to about $36 right before the dividend, dropped the $9 for the dividend, and did actually recover most of that fairly quickly — it wasn’t quite a month, but the special dividend was in early July and the shares were again over $33 by Halloween.
So yes, that one worked out quite well for investors, in no small part because the company was taken over at $44 after another year or so, and it didn’t trade down below that “ex dividend” trough over the following year… though I don’t really know what the underlying business was like at the time.
And they give other examples:
“As part of our work to find unique income opportunities, one of our researchers pointed out a large dividend he had just collected. It was a 52% one-day payout from Source Capital…
“It amounted to $32 a share! For every 100 shares he owned, he pocketed $3,200…
“‘Like hitting the lotto’ is how he put it.
“We thought – 52% sounds great. But what happens to the stock after such a big payout?
“As it turns out, after the first 45 days following this payout, the company’s stock was up another $2.”
That’s not really a “stock,” per se, that’s a closed-end fund managed by FPA — they did a huge special dividend in February because their longtime portfolio manager was retiring and they were more or less “resetting” the fund. That’s not going to have any real value for assessing whether a corporate special dividend is likely to add value, but it didn’t hurt the fund — the driving force is the net asset value of the fund, which will go up if they invest well and down if they don’t, and the fund trades at about a 10% discount to net asset value today, just like it did before the special dividend… and it still has a decent “bench” of portfolio managers at FPA, though it might be that you’d consider it less valuable now than it was when it was being run by the guy who had generate a 1,000% total return over the previous two decades.
So… does that make you want to seek out special dividends? Tempt you to think about buying Syntel shares before or after the dividend? Have any other dividend-focused strategies you favor? Let us know with a comment below… thanks!
P.S. And in case you hadn’t been thinking about this, yes — this is a fairly aggressive maneuver. Apple (AAPL) has effectively taken advantage of some of its huge cash hoard to buy back stocks and pay a dividend (though not a special dividend), but they’ve done that by borrowing the money… not by bringing it in from overseas subsidiaries and paying taxes on the money. Many companies are holding out for some kind of “repatriation holiday” that would let them bring back their cash to the US without paying the full corporate tax rate on their profits… if that happens, and the probability of that is yours to guess at, then Syntel management might feel kinda dumb for doing this now and perhaps paying more in taxes than they had to. We’ll see.
Disclosure: I do own shares of Apple, mentioned above. I am not invested in any of the other companies mentioned above, and will not trade in any covered stock for at least three days per Stock Gumshoe’s trading rules.