What’s the next “IMF Super Dividend?”

Looking at Keith Fitz-Gerald's "Super Dividends" teaser for the Money Map Report

By Travis Johnson, Stock Gumshoe, June 20, 2013

Keith Fitz-Gerald and the folks at the Money Map Report are pitching something they call “Super Dividends” — payments that dwarf the typical dividend and that they say are even distinct from “special dividends.”

But not content to promise big returns ($16,559 as soon as June 28, they say), they also claim that they can predict these Super Dividends with a high degree of certainty. And, of course, they have to come up with a gimmick to get your attention and make you believe it’s all hush-hush and top-secret … so they use the IMF.

The International Monetary Fund? What do they have to do with dividends?

Well, almost nothing. But that doesn’t stop the teaser ad from building a near-conspiracy picture of the global financial elite conspiring to keep these “Super Dividends” secret.

This is one of those neverending “infommercial” ads, so I won’t quote it directly very much, but I’ll give you the gist.

Mike Ward and Keith Fitz-Gerald think that the variety of IMF Meetings and reports that mention “Super Dividends” prove that super dividends are real and unknown, and somehow connected to this large global institution … and in fact, that they’re a “priority issue” for the IMF and other powerful organizations.

And that IMF employees are reminded not to put these things on the books as dividends — implying, perhaps, that they’re being told to keep these “super dividends” secret and obscure.

They say that these IMF reports and minutes that they cite are not meant for the general public.

Which is true — but that’s not because “Super Dividends” are secrets that the IMF and the global elite are keeping to themselves … it’s because these are generally boring and technical reports from tax-related task forces. The report they quote from 2003 is from the minutes of the Steering Group Meeting of the International Task Force on Harmonization of Public Sector Accounting — you can see that here if you like. It’s in part (a very small part) about putting together a task force to deal with some questions raised by member countries about how to make accounting for “super dividends” more standardized across countries.

And the big “handbook” that they show briefly in the infommercial is the IMF Handbook on Security Statistics. Which also has nothing to do with keeping information secret, and everything to do with helping to standardize statistics that are kept and published and used by governments and economists about equity and debt securities. You can see it here if you want, or if you’d just like to see how the IMF statistics folks classify “Super Dividends” here’s that section:

Box 6.2 Super dividends

“Dividends do not include super dividends. Super dividends are dividends that are large relative to recent dividends and earnings. In order to assess whether dividends are large, the concept of distributable income is used. The distributable income of a corporation is equal to entrepreneurial income plus all current transfers receivable, minus all current transfers payable and minus the adjustment for the change in pension entitlements. The ratio of dividends to distributable income over the recent past is used to assess the plausibility of the current level of dividends. If the level of dividends declared is greatly in excess of that seen in the recent past, those dividends are treated as financial transactions and termed “super dividends”. These super dividends are treated as the withdrawal of owners’ equity. This applies to all corporations, whether incorporated or quasi-incorporated and whether under foreign or domestic private control.

In the case of public corporations, super dividends are large and irregular payments, or payments that exceed the entrepreneurial income for the relevant accounting period, which are funded using accumulated reserves or by means of the sale of assets. The super dividends of public corporations are to be recorded as the withdrawal of equity to the extent that they exceed entrepreneurial income for the relevant accounting period.”

That’s right — what this purported secret IMF stuff is about is really mostly just the standardization of reporting and accounting … helping countries to treat similar kinds of income in the same way regardless of the country, and helping to make sure that statistics that are kept are as accurate as possible.

The fact that the IMF might use a term like “Super Dividends” may not be well known, but that’s because the inner workings of any massive, data driven bureaucratic enterprise are rarely well known — because no one cares to know, and few need to know. The IMF is not keeping track of “Super Dividends” paid by particular companies or trying to share them with their top-secret friends in high places, it’s just that the global accounting and statistics technocrats need to know that they’re all defining the data and accounting for these dividends in the same way.

Keith Fitz-Gerald, in this “special report” from Money Map, describes “Super Dividends” as a phenomenon like rogue waves … so of course, he uses the term “Rogue Income Waves”.

He says they’re not the same as “special dividends” — which are not that uncommon. “Super dividends” are “larger and more rare”, and until recently no one even knew they were happening.

Which isn’t really true, of course — these are generally significant corporate events, and they get covered in the financial news media — but they also are not particularly magical, and they’re not, unless you believe Keith Fitz-Gerald, particularly easy to predict or value.

He gives a couple examples of “Super Dividends” — one of them is Loral Space (LORL), a defense contractor, which he said paid out a massive “Super Dividend” that would equal a 68% yield at today’s price. Which sounds obviously enticing — but, of course, these are (as that IMF note indicates) special dispersals of equity in the company, not payments from ongoing corporate income. They’re not recurring, so get that 68% yield out of your head.

In Loral’s case, the company actually paid out two massive dividends last year — one that came because their Telesat division was recapitalized and pushed cash up to the parent, and the other that came after they sold their other significant division for cash and dividended out the majority of that cash. So investors who owned LORL back in the Spring of 2012 ended up with $42 of special dividend cash (I don’t know how that dividend was treated for tax purposes), and the stock was moving up through the $70s before those dividends were announced so it has worked out pretty well for those investors — they received $42 and still have a stock that’s worth $61 today. So buying before the dividend, even if you waited until the last minute that it traded with the dividend and bought at about $80 in the runup to that first payoff, would mean you paid $80 for something that ha returned $42 in cash and is still worth $61, so that’s $103 in value or about a 25% return. That’s better than the S&P 500 since April 2012, though it’s almost exactly the same return you would have seen in the aerospace and defense ETF (PPA).

I have no idea what their actual earnings potential might be going forward now, but you’d have to guess that either the shares were horribly undervalued before the dividends or they’re horribly overvalued now — otherwise it wouldn’t make sense for $42 of value to be extracted and sent to shareholders in cash while the stock price is back to where it was 18 months ago. I’d guess it’s probably actually a bit of both — LORL is probably overpriced now, with investors still loving the shiny feeling of those big dividends last year and not paying much attention to the fact that their interest in one division has been diluted by debt and the other has been sold, which would presumably impact their earnings power going forward … but it’s probably also true that the stock was undervalued because investors weren’t giving them credit for the value hidden in those divisions. Regardless, there ain’t going to be another $42 in dividends this year, and those dividends were a result of dramatic corporate changes and were probably a return of equity to shareholders, so they fit the definition of “Super Dividends.”

These kinds of large dividends caused by corporate restructurings, asset sales and the like may or may not be a boon for investors — they are indeed pretty rare, so the specifics matter a lot. There’s an interesting article here about that LORL dividend in December, by the way, that points at some of the other things that concern investors in these situations, like the implication that these deals can be more designed to reward insiders in the short term, or to help retiring executives go out at a high valuation, than they are to ensure the health and good management of the company for the future.

What we’re curious about is how Fitz-Gerald thinks he can predict these special dividends — not react to them and buy them after they’re announced, which can sometimes be worthwhile, but predict them before they’re announced. Since special and “super” dividends often cause a bit of a run-up in the share price in the weeks leading up to the dividend payment, knowing which stock to buy before the “super dividend” is mentioned by the company would probably be worthwhile.

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He claims that the companies who pay super dividends are well connected and interconnected, with board members shared, and they’re connected to the IMF because they usually manufacture or have operations in third world countries or are involved in the global monetary system. That strikes me as more silly conspiracy stuff when it comes to the IMF and the international operations stuff, but it is quite possibly true that the interconnections of board members have some slight predictive power — particularly because of activist shareholders, who often push for the kinds of reorganizations and recapitalizations that could result in a special (sorry, “super”) dividend.

Fitz-Gerald says that they start with an MIT study that tries to look for predictive factors for special dividends — I haven’t looked at any such study, but I did read an article from some MIT Researchers that studied the impact of expected changes in dividend tax rates on special dividends. That piece indicated that special dividends or accelerated dividends were more likely before expected changes in dividend tax rates, and that the impact was more significant at firms with high insider ownership — which qualifies as a “no duh” moment, management teams with large shareholdings care a lot more about how dividends are treated at the shareholder level than do management teams that don’t own meaningful amounts of their company’s stock. We saw this with tons of companies in the last quarter of 2012, with fears of a big dividend or capital gains tax hike coming on January 1 spurring companies to make special payouts or, in many cases, to prepay their dividends that would have normally come in the first few months of 2013.

But anyway, he says he screens for these predictive factors that indicate possible “Super Dividends” — high insider ownership relative to the rest of their industry, large cash balances, good profitability being key among them … but said that then you need to look for a “trigger event” that will push the company to declare a “Super Dividend.”

That means this is much more of a qualitative analysis than a quantitative one — you’re looking for corporate events and analyzing them to see if it will create a “special situation” that unlocks value. That’s an area where a lot of investors like to look for their edge, though most “special situations” analysts and investors and newsletters don’t look just for one-time dividends, they also seek out mergers, spinoffs, and the like.

And the next dividend he sees will, he thinks, be triggered perhaps by June 28, and will generate a payout to “average” investors of $16,500 or more — he even throws out a specific $16,559 number.

So what’s this upcoming special dividend? We don’t get much in the way of clues — this is what we get:

The “gold medal winner” for a potential “Super Dividend” has a 94% confidence level, according to Fitz-Gerald.

It’s in the insurance industry.

It’s flush with cash.

It has 32% insider ownership

And it has a CRSP 1272 dividend structure, is overcapitalized, is connected and interconnected.

And he also says there’s a trigger event, something about the phase-in of the new health care reform bill (Obamacare) that will mean a new tax that inspires a special dividend payout.

So what is it?

Well, “flush with cash” is common to most insurance companies, at least from a quick glance at their books, but 32% insider ownership does help us narrow it down considerably. There are many relatively small insurance companies that have large insider ownership, but the best match for 32% ownership from insiders and 5%+ owners is probably Enstar Group (ESGR), which is an odd little insurance company.

ESGR does not actually pay a dividend right now, but it has paid a special dividend in its history and it is certainly profitable enough to pay a dividend now, and could even have a relatively substantial dividend be a “1272” dividend (that just means it’s a special dividend but qualifies for dividend tax rates — the explanation of those codes is here if you’re curious). That special dividend they paid was in connection with a substantial merger, but it was also only $3 a share and the stock was trading in the neighborhood of $80 when it was announced, so it wasn’t revolutionary or all that “super.”

And it is certainly one of those interconnected and cross-connected companies, thanks to the fact that a major shareholder for years has been JC Flowers, a famous hedge fund manager, though he recently sold a substantial portion of his stake to a different hedge fund. Beyond those hedge fund stakes there is also substantial “real” insider ownership, with the CEO owning almost 3% and the CFO and some board members also holding meaningful numbers of shares. They also have a ton of cash, more than $300 per share (the stock is at $130), but they have offsetting liabilities for much of it — their book value is around $94 a share.

But when it comes to the “trigger” about health care reform and any tax impact on Enstar (or any other specific company), I’d just be guessing. Enstar is a runoff insurance company — insurance policies can have a very long tail and often live beyond the useful or profitable life of an insurance company, particularly if that insurance company gets into trouble for some reason and effectively goes out of business when it comes to selling new policies. What runoff investment companies do is buy those policies that are in runoff or buy companies that are otherwise likely to shut down and do an orderly runoff of their liabilities, sometimes over decades (an insurance company can’t just disappear — some policies can see claims against them for many years after the policies expire, and some policies, like certain kinds of life insurance, might never expire if the insured is still alive and paying premiums). That means Enstar is more of an insurance investor than it is an insurance company — they don’t sell or originate insurance policies, they buy existing policies from (often distressed) sellers. They also provide a wide variety of mostly insurance-related services, sort of like a consulting firm, but they mostly buy and sell insurance companies and their policies (the consulting/service income is likely to keep growing given recent acquisitions, but still a small portion of net income).

So the balance sheet is a little wacky — they have a massive amount of cash and investments, but also substantial liability from these runoff policies. They would have to hold a determined amount of capital in reserve, in safe investments, against potential claims and predictable claims (including annuities and life insurance), but if the claims aren’t made or are less than the reserves they can earn some of that capital back, and they collect investment income on their reserves. They can also post losses if the reserves have to be increased to meet claims or expected claims if something changes. Enstar is an active company, in just the first quarter they acquired a workers compensation insurance company called Seabridge and a life insurance company from HSBC, both of which boosted their asset value and cash balances, and both acquired firms are in the process of being put into runoff (if they’re not already there), they won’t write policies unless they’re forced by regulators to renew some policies.

I can’t pretend to have looked at Enstar closely enough to have any guess as to its valuation, or regarding whether or not they might pay a special dividend. But that’s my best guess for you, and it is certainly a “special situation” in that it’s a pretty unique company, with complicated financials that you can’t easily compare to other firms and with strong insider and hedge fund ownership. It’s also been a dramatically profitable investment since the collapse during the financial crisis (it ran up to a high of near $140 in 2007, then got crushed to below $50 in 2008 and 2009 and has built back up to near its old highs), and it trades at a lofty valuation compared to most insurance companies, with a price/book of about 1.4.

It’s a decent sized company, with a market cap of about $2 billion, and they’ve been growing revenues and earnings very nicely — analysts expect them to earn $12 a share next year, so not a bad PE valuation (just over 10) for a company with a share price of $130 … though keep in mind that while there are a dozen analysts covering the company and they gamely try to guess earnings, it’s almost impossible to do so with any certainty and their estimates have been way off in the past. Earnings are impacted greatly by investment returns, mostly on a fixed income portfolio, and on the gains and losses they book for claims and reserves changes that seem to be a bit of a black box to me, to say nothing of their frequent acquisitions. Those same analysts think ESGR will grow earnings about 10% a year going forward, for whatever that’s worth.

It’s hard to compare runoff investors to other insurance companies, though, and I don’t know of any other firms that are exclusively (or nearly exclusively) in runoff or acquiring runoff insurance assets. White Mountain (WTM), a firm that has had its share of comparisons to Berkshire Hathaway in the past, has acquired a lot of runoff operations in the past and trades at a discount to book, and other investment-focused insurance companies like Fairfax Financial (FFH) have active runoff operations, but you can’t really compare them directly and expect to learn anything from it — these are investment operations, so it’s really all about how the company buys runoff portfolios, whether they’re getting good value and managing claims well, and how much money they make investing their reserves and extra cash.

Enstar is reporting solid profitability and seems to be doing quite well from a quick glance, and they certainly have a lot of capital, but I’ve seen no particular indication that they’re about to dividend it out — on the contrary, it seems like they’re still quite acquisitive and are hoping to take advantage of insurance companies that run into problems with regulators to expand their portfolio, which indicates to me that they’d want to keep cash on hand to acquire assets when opportunity strikes. I may spend more time looking at Enstar at some point, but that’s all I can tell you today. Whether or not it’s really Keith Fitz-Gerald’s pick for this potential “Super Dividend” I can’t be sure, but it’s the best match for the Thinkolator given those limited clues.

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June 20, 2013 1:27 pm

What is the Money Map Press socket wrench system?

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June 20, 2013 1:50 pm

Just wanted to say thanks for starting the “quick take”. To me that alone is more than worth the meager charge for being an Irregular. Sorry I do not leave comments but being in the financial business I am restricted. I do enjoy your reviews. Larry