The S&A Digest: Dividend Grabs Put to the Test

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

As of 07/01/2013

Our quant analyst proves dividend grabbing works... A drunken tanuki at Motorola?... Homebuilders get smacked, again... Your Congressman's portfolio... Why Ferris avoids America's most admired companies... More about Tulum...

According to press reports, supermarket magnate Ron Burkle's plan to take control of Tribune Company (TRB) would including paying a $27 dividend to shareholders. The stock closed on Friday at $30.53. Management is rumored to favor Sam Zell's $33-per-share bid. If Burkle wins... wow... that's probably a great dividend to grab. We're coving the situation in our newest publication – S&A Dividend Grabber.

Bill Gates will speak at Harvard's commencement ceremony in June. Gates, you'll remember, dropped out of Harvard... I'll let you insert your own pithy remark here about the relative usefulness of an Ivy League degree versus its cost. I tried to hire a Harvard MBA once... but he thought our business wasn't going anywhere, and he didn't want to give up using his Harvard e-mail address. What a chump.

Net profit for the nation's No. 5 homebuilder, KB Home, fell 84% in the first quarter of 2007. The company lost $27.5 million, or $0.34 a share, which was twice the analyst estimate of a $0.17 loss. In February, the government reported, sales of all-new homes declined 18.3%.

Despite the bad news for homebuilders, contrarian investors continue to poke around in the sector. Inside Strategist pick WCI Communities (WCI), with a big portfolio of Florida real estate, is considering Carl Icahn's $22-per-share offer for the company. Shares are currently trading above $22 in anticipation of a rival bid from hedge fund SAC Capital.

This from our own contrarian, Dan Ferris: "Just finished reading an interesting stock-market study – 'Sometimes The Worst Are First' – in Fortune. It shows companies in the bottom half of Fortune's Most Admired Companies surveys have outperformed the top of the list, consistently. 'From 1983 to 2006, the mean annualized return of the less admired companies was 17.8%, beating the more admired group's 15.4% return.'"

What studies like this and also the popular business book Good to Great leave out is the reason why the returns are consistently better in unpopular and unloved businesses – their equity is cheaper to buy. In regard to Fortune's study, the average price-to-book ratio of the most admired stocks over the 23-year period was 2x, versus 1.3x for the less admired group. The difference in price explains all of the relative difference in performance.

An interesting "webpage" discovered by our resident British immigrant and income analyst, Tom Dyson. "This webpage shows you all the stock holdings and assets of the richest U.S. congressmen..."

On the recent weakness in Motorola's stock, Carl Icahn increased his stake to 2.7% from 2.48% of the company. Dan Ferris says of Motorola's negative press coverage and Icahn's buying: "They might not ring a bell at the top, but they sure drum like a drunken tanuki at the bottom." Does anyone know what a drunken tanuki is?

Signs of a top: One of the biggest players in the private-equity game, Carlyle Group, is currently raising money for a $15 billion buyout fund, nearly twice as large as its last fund.

Sam's Club's new spring 2007 catalog offers a $495,000 yacht, a Kentucky Derby vacation for $89,000, and an Italian vacation for $54,000.

New highs... at last! Enterprise Products (EPD), Marathon Oil (MRO), Annaly (NLY), Kayne Anderson (KYN), Macquarie Global (MGU), Telstra (TLS).

Not much venom in the mailbag today, except for several e-mails from subscribers upset about the title of Graham Summers' article How High Can a Dead Cat Bounce. People, people... a "dead cat bounce" is a common financial metaphor. We didn't make it up. (And, although we're dog people, we'd never want to see anything dead "bounce," not even a cat.) Got something to say about our work? Direct your insults here: feedback@stansberryresearch.com.

"I recently subscribed to the Dividend Grabber and understand the principles behind the profit potential. It may be a 'no brainer' in a bull market but will the strategy work just as well in the coming bear market?" – Paid-up subscriber Kobus Raath

Porter comment: Why don't you see for yourself? Today, General Maritime (GMR) is trading ex-dividend from a $15 payout. Shipping has been in a bear market for about 18 months. The stock was up more than 10% at one point today.

And if these newspaper deals go through, there will almost certainly be several large special dividends. Newspapers have been in a bear market since the late 1990s. But I expect these dividends will all be profitable to grab.

"I'm excited about the new Dividend Grabber and plan to sign up in the next day or two. I've already made more than the first year's subscription on the free advice you've given us in the Digest regarding special dividends. Thanks for all that." – Paid-up subscriber Anne Denton

Porter comment: What are you waiting for?

"I've been vacationing in Tulum for many years now, staying in the beachfront thatched-roof cabana 'resorts' that have no electricity and barely-running brackish water... You are right about the development that will soon arrive there – we've seen it creeping in for a few years now. And I'll be sad – and moving on to some other unspoiled place – if and when Tulum is 'Hyatt-ized' as you predict. Those who have known Tulum for years have no desire to see it become Cancun south, but it's unavoidable. I hope my visit to Tulum this June is not my last." – Paid-up subscriber Rob Schoen

Porter comment: I don't believe Tulum will become anything like Cancun. You can't build a large resort to compete with Cancun, when Cancun is much closer to the airport. What you can build successfully are very high-end boutique hotels and condos that will match the vibe of this very beautiful, very laid-back place. That's what's happening now... and I think it's very attractive for investors. If you want to be in real estate, I'd hop on a plane, book a cheap hotel in Playa del Carmen (there are dozens), and spend a week with real estate agents in and around Tulum.

"I have made money on most of the S&A recommendations I have purchased, and lost money on several as well. If I were to value my S&A subscription based purely on your newsletters' recommendations I could neither vilify nor deify you and your associates. Where I find great value in your investment letters is in the analysis of your recommendations. The different but systematic patterns of analysis in your S&A letters enable me to evaluate a company or situation from several different paradigms. My goal when I subscribed wasn't to have you make me rich nor did I intend to abdicate my responsibility to due diligence, but I did expect to become a smarter investor." – Paid-up subscriber Dave Black

"I've learned a lot from reading your comments and enjoyed it all. I will continue to read and learn. You pointed out that Berkshire Hathaway has averaged over a 21% gain per year for the last 41 years. So... why should I not forget all your sharp shooters and just put my spare money with Buffett?" – Paid-up subscriber Robert Hallock

Porter comment: Good question.

"I phoned your c/s people yesterday, and a young man there told me I should be able to access all the information with my original TW username and password. When I reported to him that your website was down, he told me that, 'It should be up now.' That was yesterday. Last I checked earlier today, it's still down. Now I understand that your technical team is working 'feverishly' to correct the problem, but, c'mon... it's been ten days! I'm thinking it may be time to kick some IT behind, waddaya think?" – Paid-up subscriber Jim Geiger

Porter comment: You have no idea... We're rebuilding the entire website and we're hosting it with another provider. You'll have to log in individually for each product you subscribe to, but this should keep us up until we've got the whole problem solved.

"Eight months ago, Graham Summers prognosticated with this comment in The Growth Stock Wire: 'Subprime lending comprised 34% of all mortgage originations in the U.S. for the first three months of 2006. If a slowdown in mortgage lending is coming, this will be the first segment to show signs of trouble.' I'll say!" – Paid-up subscriber Brian Clark

Regards,

Porter Stansberry

Baltimore, Maryland

Dividend Grabs Put to the Test

By Ian Davis

Should you bother grabbing a dividend? Last week, I told you about a small study I conducted that suggested dividend grabbing might be worth your while.

This week, we see that a larger sample confirms the theory. Before I get to the particulars, let's take a look at why dividend grabbing should work.

The idea is a company will pay a large, special dividend for two reasons: One, it has so much cash that it doesn't know what to do with it; or two, it is trying to fend off a private-equity bid.

In both of these situations, the payment of the special dividend has little effect on the company's future earnings. However, the price of the stock almost always falls by the same amount as the special dividend (see chart), causing these companies to become undervalued on a price-to-earnings basis. This short-term fall often corrects itself in the following months, leading to extraordinary gains.

Stocks Consistently Fall by the Dividend Amount

This seems like a logical theory, but I know the market doesn't always act rationally. To make sure the numbers agreed with the theory, I spent most of last week putting the dividend-grabbing strategy to the test.

GRAB DIVIDENDS FOR CONSISTENT PROFITS

I performed the study on the 952 stocks in DataStream's Total Market – United States index.

I looked at the price history of these stocks going back as much as 37 years, where data was available, and included occurrences of both large and small special dividends.

Stocks that paid a special dividend rebounded consistently: 87.3% of the stocks that paid special dividends rebounded to new highs within one year of their ex-dividend date (91.8% rebounded within two years). As you can see below, the larger the special-dividend payment, the longer it took the stock to reach new highs...

Large Dividends Lead to Larger Rebound Times

Stocks that paid a special dividend produced good annualized returns if you held them until they reached new highs. The annualized median return per dividend grab was 25.2% (holding the stock from the day before the ex-dividend date to the first day it closed at a new high).

Stocks that paid a special dividend also produced good annualized returns if you held them for a set time period. In the following chart, I compared the median returns produced from buying a stock that paid a special dividend (and holding it one, three, six, or 12 months) to the median returns achieved over the same period in the S&P 500. As you can see, stocks that paid a special dividend perform better on average than the overall market for all time periods analyzed.

Median Return - Purchasing a Stock One Day Before the Ex-Div. Date

YOUR RESULTS MAY BE EVEN BETTER

The list of companies I studied had not been filtered to remove companies with poor financials or management issues. The only thing I knew about these companies going into the study was that, to date, none of them have gone bankrupt.

Buying companies that are in good financial shape should lead to even more impressive results.

Good investing,

Ian Davis

March 26, 2007

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