by Travis Johnson, Stock Gumshoe | January 9, 2019 4:21 pm
We’ve gotten similar “liberty check” pitches from Stephen Mauzy and Ian Wyatt in the past, but they always sound so very compelling and bring a lot of questions our way… so we’re looking at another ad today.
I’m going off of a promo for a special “webinar” that they were hosting today, and I didn’t listen to the webinar (life is too short), but I would assume that they were using the presentation to hint further at this “liberty check” and sell subscriptions to Mauzy’s Dividend Confidential… that’s what similar past presentations have led to.
This one says that we can earn a “$4.25 Liberty Check” on each “Liberty Voucher” if we buy now… here’s a bit of the spiel from the email I received this morning:
“The winter solstice holidays fade farther in the rear window. The bills associated with the holiday festivities fast approach.
“Would a ‘liberty check’ help relieve the impending financial burden?
“I bet it would.
“The good news is that we have a high-yield liberty check on immediate offer. Many investors have already claimed their check. Some will claim a check of $2,307, enough to settle all holiday accounts… and leave enough to fund additional festivities.”
Sounds kinda like “free money,” right? If you can use it to pay bills that you otherwise wouldn’t be able to pay, wouldn’t that mean that it’s some sort of magical windfall?
Not quite… these ads are always pitching special dividends, which do indeed roll out from time to time… but they are just a way of moving money from one pocket to another. You buy shares of a company before a special dividend is paid, they pay you the special dividend (on which you might owe taxes, depending on how it’s classified by the company), and then your shares drop in value by the amount of the special dividend.
The beauty of these situations is when you get a company that really does have “addition by subtraction,” or where the business is going well enough that people don’t care about the business they sold or the cash they’re spinning out to shareholders, and it doesn’t impact investors’ view of the value of the company… in those cases, sometimes the share value will climb back up over time and allow you to have a real return on your investment, not just the sugar rush of having some of your investment returned by getting a check in the mail. That doesn’t happen every time, but it can happen.
So what’s the situation this time? More from Stephen Mauzy’s email:
“… ‘liberty vouchers’ of a small aerospace company. The company recently declared a S4.25 liberty check on each liberty voucher. The checks generated a yield in excessive of 23%.
“The aerospace company issuing these liberty checks is headquartered in Melville, New York. It has a long operating history. The company was founded in 1954. Its liberty vouchers have been publicly traded since 1987.
“The liberty checks paid by the aerospace company are worth collecting; its liberty vouchers are worth owning.”
You can mentally translate as we go along — “Liberty Checks” are just “special dividends” … and “Liberty Vouchers” are “shares”.
But anyway, why does this company have a bunch of cash to send out to shareholders? More from the ad:
“The company develops and manufactures hot-melt advanced composite materials.
“The company has further narrowed its focus to increase margins and profits. It has purposely shrunk itself by selling less efficient businesses.
“The most recent downsizing occurred in early December. The company completed the sale of its electronics business. It received $145 million in compensation.
“A portion of the proceeds from the sale of the electronics business will fund the liberty check. The remainder will be invested in the existing business.”
OK, so this is an argument that we’re getting “less is more” — the company is getting better by focusing on profitable and growing operations, and after selling off a less profitable division it’s rewarding shareholders with a special cash dividend… which presumably means that they have a good balance sheet (thought not always — sometimes companies borrow money to pay out big special dividends, which means they’re taking extra risks).
Any specifics about the company?
“The company reported $12.85 million in revenue from continuing operations in the third quarter ended Nov. 25. Revenue was up 26% year over year.
“Net earnings from continuing operations posted at $2.08 million for the quarter compared to $344,000 for the year-ago quarter. That’s a whopping 500% increase.”
And apparently this is a family business to some degree, which can often be a good thing — the founder’s son owns a lot of shares, and sometimes big insider ownership is a major motivation for special dividends, particularly when insiders want to maintain control and don’t want to sell shares, but do want to pull out some cash.
So we’re told that “Investors can claim liberty checks of $2,307-or-more with only a modest investment.” What’s the stock, and what does that mean?
The stock, sez the Mighty, Mighty Thinkolator, is Park Electrochemical (PKE), which did indeed report strong third quarter results and announce a large $4.25 per share special dividend last week.
And yes, they’re in the aerospace business — that’s their remaining operational division, after selling off their electronics business last month to a Japanese company. That sale did indeed net them $145 million in cash, and they have committed about $86 million of that to pay this year’s special dividend of $4.25 per share.
The rest will presumably be used to invest in growing their aerospace business — they have announced an expansion to their Kansas facility that will cost about $19 million, so they must see some increased demand.
I haven’t heard of the company before, but this is a special dividend that makes sense and shouldn’t result in any meaningful balance sheet pressure for the company, which is good — Park is not a huge company, they have a market cap of about $450 million, and they have mostly rewarded shareholders through dividends over the years, including special dividends in most years. The 10-year return does not look so enticing if you just look at the share price…
But it improves a bit if you look at total return, which includes those dividends:
That’s a solid return, but not an exciting one — we can layer in the broad market (the S&P 500) and see that their 126% 10-year return is a lot worse than you would have gotten from a broad index fund.
I don’t know that this will suddenly turn into a barn burner, for that you’d have to dig into the actual operations of the company and see if you can figure out where growth is coming from, and what the prospects are for their major customers and products… there’s no analyst coverage, and they don’t provide guidance that I’ve seen, so it would take some work.
This is a company that has now gone through a pretty substantial amount of restructuring over the past couple years that involved both selling and shuttering some of their divisions to focus on what they see as their most profitable and compelling business in aerospace materials. That meant revenue dropped pretty substantially in 2017, but they also were able to repatriate their foreign cash holdings to the US and use that cash to pay off all their debt, and pay more special dividends, so those dividends have recently been large ($3 at this time a year ago, in addition to the regular 10 cent quarterly dividend that they’ve paid consistently for years).
Those special dividends have been something of a habit, though they haven’t paid them every year and they haven’t always grown. From a quick glance at their last ten years or so of cash flow, it looks like the 10 cents per quarter in regular dividends accounts for the lion’s share of their cash from operations most of the time, and the special dividends have been used to distribute excess cash to shareholders (the company has had an abnormally large cash balance — often 25-30% of the market cap has been cash and cash equivalents over the past decade, and it doesn’t look like that’s going to be the case any more unless they start to generate a lot more cash from the aerospace business than they have been).
Which is a long way of saying that I wouldn’t expect special dividends to grow in the future, or even necessarily to continue at all, though the history indicates that they might continue to pay special dividends if they have a lot more cash than they need to reinvest in the business and pay the regular dividend (they’ve paid about $25 in dividends since 2005, they say, and the stock trades at about the same price per share as it did in January of 2005 so those dividends have been the real return). They just won’t have a pile of hundreds of millions of dollars in cash to disburse like they did five or six years ago, or just now after selling what’s presumably their last “extra” division.
That’s not necessarily a bad thing, it could still be a decent investment if the aerospace business continues to grow profitably, and they do pay that regular dividend that tallies up at 1.8% a year. There are no analysts covering this little stock, and it won’t necessarily get a lot of attention, but it looks like a decent little business.
I’m no expert on the fundamentals here and haven’t read all the filings, I just skimmed through the financials, but my initial supposition is that probably the biggest risk is in overall military and aerospace spending. If they have been puttering along at a decent level of sales, growing in aerospace with new advanced materials and parts that seem to be in demand, then presumably they have some competitive advantage in their niche — not enough to demand usurious prices, I guess, since they haven’t grown revenue all that dramatically even during very heavy military spending periods, but enough that they haven’t been competed out of existence by larger companies.
And that’s about all I can tell you without being more of an expert on the military aerospace supply chain — they seem to be profitable and doing quite well, and they’re investing in growth so there’s some hope of a long-term return on investment in what appears to be a pretty high margin business, but they’re small and haven’t caught a lot of investor attention in the past, and don’t seem terribly aggressive, so I wouldn’t necessarily expect fireworks.
How about the special dividend? That’s really just taking cash the company has and putting it in your pocket, so you get a tax bill for it… and if the shares are at $22 on the day before it goes ex-dividend, they should open at $17.75 the next morning as you await the delivery, a few days later, of your $4.25 special dividend (sorry, I meant “liberty check”).
So if you want to receive a $2,307 “liberty check,” you’d first have to buy 543 shares of Park Electrochemical. At current prices, that would cost you about $12,000… so the “free money” magic bit is a little silly, if you have $12,000 to consider investing today then you’re probably not looking for a couple thousand dollars to cover the Christmas credit card bill.
But that doesn’t mean such an investment would be unprofitable — just that it’s an investment in a company that pays a dividend, not a “voucher” that you can use to get a “check.”
The real question for special dividends is whether the stock recovers after the dividend is paid — which depends partly on whether investors were giving the company credit for the cash balance before they knew that the company was going to pay it out. Because Park Electrochemical has been paying special dividends for a while, we can look at the last one to see if it worked out well for investors — that’s no guarantee for the future, but it provides a possible blueprint for what could happen.
Last year, they announced the dividend on January 4 and paid it on February 13. Here’s what the stock price looked like for that time period (December to February) — the blue line is the stock price, which dropped on the day it went ex-dividend, the orange line is the total return including that $3 of cash you were entitled to on that day:
The tricky thing is that investing in special dividend situations often works out a lot better if you own the stock BEFORE the dividend is announced. That’s because people get attracted to the idea of a huge dividend (which is also why they’re used to sell newsletters), and they bid up the price of the stock in order to “get a piece” of that dividend. But in this case, holding through the announcement and the payment would have gotten you just a 2.5% return overall.
What does the chart look like so far for this latest one? Here’s the chart over the past month:
Uh oh… looks like it already had that “special dividend announced” surge — it took a couple days, but the stock went up by almost $4 in anticipation of receiving a $4.25 dividend. Will it go up further as we get closer to the ex-dividend date of February 4? Maybe, that’s sometimes how it works… but they don’t always — and that was a pretty good pop already (“ex dividend” just means the first day it trades without the rights to the dividend).
My general strategy with these kinds of situations, unless I’m fortunate enough to buy a stock before a special dividend is announced, would be to buy it after the ex-dividend date — the stock often falls by more than $4.25 if a bunch of folks who had driven it up just to get the dividend decide to sell as soon as possible, so sometimes if you like the company’s future prospects, you can get a decent stock a bit cheaper. Last year, the shares rose by the amount of the special dividend, dropped appropriately by the amount of the dividend on the ex-dividend date, but then also kept falling for a few weeks after that, eventually getting back to what someone who owned the stock a few months prior would call “flat.”
So if you like the fundamentals of the company, I’d say there’s a decent chance of the stock falling to $15 or so over the next few months — that’s just going by the price before the market collapse back in October of $19.50, minus the $4.25 special dividend. (You could even be more conservative and use the December lows to get a target of $13, but that seems excessive to me). That may be too low a price to shoot for if you actually have reasons to like the company and aren’t just thinking about trading around the impact of the special dividend, but in the absence of any real analysis about their actual business prospects or their earnings potential for 2020, that’s the number that what would catch my eye.
Buying at $22+ seems a little optimistic even if you have some reason to expect the company to grow nicely next year, but it could work out — when investor sentiment about a company is really good, the shares can sometimes bounce back immediately on the ex-dividend date and make up a lot of the losses… though in that case, were I excited about the company, I’d still just wait to buy at the open on the ex-dividend date — no point in paying taxes on that special dividend just because I wanted to buy the stock a few days earlier.
We’ll see how it goes… but there you have it, there’s your “liberty check.” As with all such things, there ain’t no free money. And it’s really the company and the profitability of its operations and its future prospects that matters over the long run, not the specific manner in which they return capital or earnings to shareholders.
Have any thoughts about this one? Ever looked at Park Electrochemical before, or have special dividend experiences to share with your fellow readers? Please share, just use our friendly little comment box below — thanks for reading!
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