“Grab the Biggest Oil Dividend of 2008”

I’ve written a few times in the past about the tempting teasers sent out by the folks at the Stansberry & Associates Dividend Grabber service … indeed, just the name of the newsletter itself is enough to dampen the lips — grabbing dividends, mmmm …

Unfortunately, it doesn’t quite work out every time. The first one of these teasers that I looked at was for Palm, just over a year ago. The stock was trading for about $17.50, and the company had just announced that they were going to restructure fairly significantly, a restructuring that included a big investment from private equity folks, the assumption of a lot more debt, and a large one-time special dividend to all shareholders of $9.

This new oil dividend has some similarities with the Palm situation, I expect … will it be a better or worse idea for investors?

In the case of Palm and their special payout last year, It took quite a while to get this all worked out — during which the actual underlying business at Palm continued to look pretty weak, with the Treo steadily losing share to the Blackberry and to the then-new iPhone, one product launch that was abruptly aborted, and, finally one promising product in the form of the cheap low-end smartphone, the Centro.

But work it out they did, and they did pay out that special dividend late last fall, so stockholders all got their $9 checks.

Unfortunately, if you stop for a moment to do the math you come to the realization that frustrated many subscribers to the Dividend Grabber service — not every big special dividend is a good deal. In this case, imagine that you bought shares at $17.50 (you could have gotten them for a bit more or less, certainly, but that’s the price I saw on the day I first saw the email ad).

Take away the $9 special dividend. Simple math here, we all remember subtraction — so now your cost basis in the shares is $8.50.

Well, dang — today the shares are trading at about $5.50. So you’ve got the $9 in your pocket from the dividend, and a share in a heavily indebted company that’s worth a lot less than you paid for it at the moment. And I don’t know how they structured that dividend, but I suppose you might even have had to pay taxes on it.

I don’t mean to cool the jets too much here — there has certainly been plenty of academic research done that dividend paying stocks are stronger than those that don’t pay dividends, over the long run. And I’ve seen analysis that’s fairly compelling that, most of the time, companies that make big special dividend payments tend to see their share price also rise over the coming six months to a year. That stands to reason — a special dividend will usually be sent to shareholders becaue of some significant shuffling at the company, shuffling which should be expected to improve their performance … either that, or it might be due to a spinoff or sale of a division that was distracting from the core focus, or just — as was the case with Microsoft a couple years ago — a company acknowledging that it had an embarrassingly huge pile of cash and no idea what else to do with it.

So, oftentimes, a company paying out a special dividend might be worth a look. But that doesn’t mean you shouldn’t consider it just as carefully as you would any other investment — I still wouldn’t touch Palm, personally, largely because of the shoddy two-steps-behind products I’ve owned from them in the last two years, and their seeming inability to catch up with their much stronger and wealthier competitors, so I certainly wouldn’t buy shares just because they were planning to return some cash to me — a special dividend in the short run is almost always entirely neutral, they send you the cash and the shares drop by the exact same amount. In the long run it might be a good thing IF it’s done for the right reasons and if you think the company is a compelling buy for other reasons.

So there’s the longest preamble in the history of Gumshoe nation, eh? We do indeed have a new special dividend company to look at today, and it’s in the energy sector.

In case you haven’t noticed, the price of oil is pretty high, and most of the companies in the oil patch are using hundred dollar bills to light their cigars again. Oh, you had noticed? Right … maybe the newsletter guys thought that whole “oil” thing would catch your attention as you come in on a Monday morning after spending $380 to fill your tank, hmmm?

Here’s what they say in the ad about the potential for these types of investments:

“We analyzed 5 years of these special dividend situations and many times these companies see their share price take off 3-6 months following a big dividend payout.”

Which I won’t argue with — though note that “many times” is not a particularly precise analysis. It’s also true that “many times” the shares do not take off within six months.

The more distressing quote is …

“Anyone can use this strategy to collect extra cash quickly and easily …”

And that just bugs me — because you can’t collect extra cash quickly or easily just from getting a special dividend. That’s like saying you can collect extra cash quickly just by buying half as many shares as you were planning on — if you buy a stock because of a special dividend that’s coming in a few weeks or months, and you get that dividend, you’re effectively just getting back some portion of your capital. That’s capital, as in, “money you had in the first place.”

But I’ll get off my high horse for just long enough to try to figure out what oil company they’re talking about … stay with me …

Here’s what they provide by way of details … or as I like to call them, “clues”:

“On April 21, 2008 an American oil company announced it will pay a 21% dividend, totaling over $600 million in checks…

“The company is a $1.27 billion oil services company based out of Midland, Texas.

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