MNDO dividend speculation — a bad neighborhood

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17620vOn January 23rd, 2014, I wrote a posting (here) about how someone or something had bought perhaps 750 thousand shares of MNDO, the equity of Mind CTI, a micro-cap that I have written about in the past (refer to the XREFs section (here) to get a handle on previous articles about Mind CTI.)

This purchase — at a simple average purchase price of $2.19 per share — represented an investment of at least $1.6 million. A tidy sum by any measure.

Dividend March 2013Yesterday, Mind CTI announced that it had received court approval for a dividend in the amount of $0.24 per share (under Israeli company law, a company that distributes profit must seek court approval for such distribution in certain circumstances where profit and distribution is reasonably close to each other or distribution exceeds profit, and, since Mind CTI’s dividend policy essentially sets a regular dividend equal to EBITDA, the company routinely seeks and gets such approval.)

On a pre-tax basis, a dividend of $0.24 per share equals a yield of more than 10%, a unique gold-standard for profit sharing that I have written about in the past (here.) In fact, had you bought MNDO on one of the its annual regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price excursions, your yield would be close to 15%, unparalleled in the world of micro-cap technology stocks.

There is a distinct possibility that the buyer of the 750 thousand shares has extremely short-term interests in MNDO, gambling, in essence, on achieving a two-for-one benefit, in the form of an increase in the per share price in the time period leading up to the dividend issue and the actual dividend payment itself.

If so, the buyer is, of course, playing with fire since, when you take into effect the mandatory tax withholding and the aforementioned regular-as-a-clockwork-post-dividend-payout-drop-in-per-share-price, there can be no assurance that an average exit price of $2.19 plus some margin (to account for the tax withholding) can be achieved. In fact, even if the per share price does increase over the coming period, 750 thousand shares is so much out of proportion to the average daily volume that the actual exit can cause a collapse in the per share price, making the speculative dividend play a loser.

I sure hope that whoever engineered the purchase knows what he or she is doing. Normally you would, of course, assume so, but I am a bit jaded as I keep running into investment professionals who does not appear to grasp that dividends are a zero-sum game and that the very nature of Mind CTI’s dividends, which are so large and so spaced out in time as to make the automatic post-dividend adjustment of the per share price sufficiently significant that the market simply absorb it the same way that it can for, say, a quarterly dividend paid by a utility, makes it negative-sum game.

Crudely speaking, unless the entry point is timed meticulously, a dividend speculator will lose his or her shirt on MNDO.

Regardless of this particular buyer’s intelligence, the developments have not been good lately. The purchase, which, as it must for low liquidity stocks, happened piece-meal, drove the per share price from $2.10 to $2.25.

With the per share price now having reverted to $2.10 and assuming an average buy price of $2.19, the mystery purchaser is faced with a negative balance of almost $70 thousand.

Should the dividend clock ring tomorrow, the purchaser would, if he or she attempted to exit immediately, face a net loss somewhere in the neighborhood of $200 thousand when taxes plus downward pressure on the per share price are taken into account.

That, of course, is a pretty bad neighborhood to be in, so perhaps the purchaser has other plans.

Participate, please….

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