The S& Digest: Recapping the HMA Dividend Grab

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/02/2013

Recapping the HMA 50% dividend "grab"... The Saudis aren't worried about peak oil... The mania in China continues... Do you have a license for those "grillz"...? More than you want to know about Ford...

Saudi Arabia will cut oil output by 158,000 barrels per day. Oil rose $0.33 to $54.01 a barrel on the news. If peak oil were real and looming, why would oil-producing nations require a cartel to limit production and keep prices up?

China's benchmark index, the Shanghai Composite Index, rose 130% in 2006 and continues to move higher this year. Online trading in China is booming alongside the market, with 90,000 new accounts being opened daily. This asset inflation is the product of China's undervalued (aka manipulated) currency market, something we've been writing about since 2003.

Thank goodness the government arrived in time... Tennessee lawmaker John Deberry Jr. is pushing a "Grills Bill." The legislation would forbid anyone but a dentist from taking impressions of teeth to make the mouth jewelry known as "grillz." The bill is aimed at mall kiosks and jewelry stores that provide the service in unsanitary conditions.

New highs: Plum Creek Timber (PCL), Kodiak Oil & Gas (KOG), Allegheny Tech (ATI), Southern Copper (PCU).

Yes... it was a brief Digest today. But I'm facing my newsletter's deadline this week. Besides, for most of you (apparently), the Digest is rarely brief enough. Keep the complaints coming here: feedback@stansberryresearch.com. Don't hold back... tell us how you really feel. We'll read 'em. The mailbag is below.

"It is so hard to sort the wheat from the chaff. I only read at 250 words per minute, so I find it a waste of time to wade through your promises to find yet another offer to subscribe to your sidekick's ads. For crying out loud, cut to the chase. If you have some advice to give, I am ready. If not, give me my money back!" – Paid-up subscriber Dick

Porter Comment: We don't charge a percentage of your assets. We let you keep all of your trading profits. And we'll always give you your money back, if you ask us for it. The downside of our business model is advertising: It's what keeps us in business.

"From 1986 to 1999 I lived on Sugarloaf Key. About 3 times a year we would go to dinner at Little Pine Island but never spent the night. If you stayed there, your investments must be treating you well. Sorry the weather was so poor for your trip but you at least got to play one. I thoroughly enjoy the newsletter." – Paid-up subscriber Bob Rowe

Porter Comment: It is a very fancy place... and I wouldn't have stayed there if it were just some fishing buddies and me. But, this year, for the first time ever, I took my father fishing with me. We don't see each other much... and he deserves the best money can buy.

"A pleasant surprise... Following my recent sign-up for the Alliance subscription, I received two books (Jim Rogers & Jack Schwager), an executive valise, and some tasty 'sweet-treats.' Very much appreciated." – S&A Alliance subscriber Brian Clark

Porter Comment: You're the first subscriber that's ever said "thanks" for those books. You're very welcome. Thank you for your subscription and for supporting our business. We'll do the very best we can for you.

"Thanks, Kathleen, I never knew [Ford] had [a homosexual agenda]. Too bad Ford doesn't make anything I want to buy with my excess disposable gay dollars or I could put another punch into my queer card and get the dinette set. Or maybe the reason Ford (and GM and DC) are in trouble is they make cars that lots of people besides me don't want..." – Paid-up subscriber David Broudy

"The first silver hair you gave me happened when you turned 6! Now, though, your stubbornness is paying off for you. Thankfully, I don't have to listen to all the contrarian viewpoints anymore. That is a relief! But I do miss you and the laughter you always bring to our life. Thanks for the birthday wish – only wish you had been here in person to deliver it." – Complimentary subscriber Lynn Stansberry

Porter Comment: Like the rest of our long-suffering readers, even my mother thinks I'm nuts most of the time.

Recapping the HMA Dividend Grab

As we reported earlier, HMA will pay a $10 dividend on March 1. Considering the shares trade for around $20 today, this is a substantial (50%) one-time special dividend. It's also a great test of our "dividend grabber" strategy.

Here's how it will work:

According to HMA, the dividend will be paid on March 1 to holders of record as of February 27. The stock will begin trading "ex-dividend" on March 2 (when we expect the share price to fall by $10). No, buying put options will not protect you from the expected dip. (In the options market, special dividends are treated like share splits, according to our options expert, Jeff Clark.)

As to when you must own the stock to qualify for the dividend and how long you must hold it, the rules on dividends vary with different exchanges. The NYSE rules say investors must buy stocks five business days before the record date in order to qualify for the dividend. And HMA says you must hold the stock through the payment date (March 1) in order to receive it. To be safe, we'd recommend buying the stock no later than February 20 and selling no sooner than March 3.

For our track record, we "bought" the stock when we initially recommended it to you. We'll recommend selling it either on a trailing-stop basis (including the dividend you'll receive), or at some point after it reaches a new high price above our initial purchase price. Our goal is to "grab" the dividend safely within six months by selling the stock for at least as much as we paid for it.

Many subscribers have questioned the wisdom of our "dividend grabber" strategy. "Why bother to buy a stock to get the dividend when you know its share price will fall by a very similar amount?"

In our study of large, special dividends over a five-year period, we found, in every case except one, that share prices rebounded to a post-dividend high within six months. Therefore, we've speculated that, more often than not, when companies pay large, one-time special dividends, shareholders can often "grab" the dividend safely. In this case, for example, we expect HMA to rebound above $20 per share within six months.

Buying HMA for the dividend payment in tax-advantaged accounts might allow you to get all of the profits from a six-month investment, up front. Even in regular brokerage accounts, because dividends are taxed at a 15% rate, it usually is preferable to book dividend income in lieu of short-term capital gains, which are taxed as ordinary income. And... it's always better to have the profit up front, isn't it? You can put it back to work somewhere else.

So far, we've recommended five of these "grabs" in The Digest (WYNN, SKS, BKE, BXP, and IPSU). Our first was published on November 15. All five recommendations have been profitable. The average gain, so far, is 19.8%... in only three and a half months.

Keep in mind, these "grabs" are not risk-free – there is no assurance the stock price won't decline in excess of the dividend amount. And there's no assurance the stock will go up after the dividend is paid.

So, what explains the excellent performance of these recommendations?

The answer is human emotions. Management teams are always reluctant to give up assets. When companies decide to pay back large amounts of capital to shareholders, it means the management doesn't need the capital to run the business. And, since most companies are valued by the market on a multiple of their earnings (not by their net assets), it makes sense that special dividends shouldn't hurt the market value of a business. The result is that investors frequently can get large, special dividends for "free."

The HMA example we're covering now is a great test of this theory because, unlike the earlier recommendations, HMA isn't paying out cash on hand. Instead, this dividend payment is part of a larger "recapitalization" of the business that will result in substantially more debt. HMA is borrowing the money it needs to make this dividend payment. It's the same thing a private-equity firm would do if it were to buy the company.

Some investors are spooked by the additional leverage. We think the deal is copasetic because the company's asset base – hospitals in southern states – is non-cyclical and growing.

Will it work? Can you really make 50% – up front – and hope to sell the stock back at $20 in less than six months' time?

We'll see.

Regards,

Porter Stansberry

Baltimore, Maryland

January 30, 2007

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