How to Profit From Dividend Reinstatements: Case Studies
Jan 15th 2014 1:01PM
Updated Jan 16th 2014 10:14AM
After market close on Jan. 14, shares of General Motors jumped around 3% as the automaker declared its first dividend since the old GM was restructured. The reinstatement of this dividend was not a surprise, yet the market reacted positively. Let's explore three examples of a dividend reinstatement, and show that it's often fairly easy to predict that a company will reinstate its dividend.
Return of the dividend
Once a company begins paying a regular dividend, it's tough to stop, or even reduce, payments without spooking the market. But when the very solvency of the company is on the line, dividends are almost always the first to go.
GM slashed its dividend a few years back, as the automaker tried to preserve cash to weather the 2008 economic collapse. Ultimately unsuccessful, former GM shareholders never saw another dividend again, and were wiped out in the restructuring. The $0.30 dividend declared by GM will be the first paid by the new GM, and it comes at a time when the company has made major strides in turning around.
With the last of the U.S. government's shares sold (the Canadian government still retains a stake), strong profits, and around $27 billion in cash on hand, shareholders have been clamoring for a dividend -- and GM has obliged.
While GM sailed into uneasy waters back in 2008, American International Group threatened to bring the financial system to its knees. As troubles at AIG became apparent, the common stock dividend had to go. Shortly after, AIG became 79.9% owned by the U.S. government, as billions of dollars were injected into the ailing insurance giant.
But, like so many other recipients of bailout money, AIG shares bounced back. Sure, they're nowhere near their pre-recession highs, and will not be again for decades due to massive dilution; but the company did survive, and is once again profitable. Following the repurchasing of billions in common stock from the government, AIG reinstated its dividend in Aug. of 2013. Even though the dividend is below most insurance peers, AIG stock still rose 6% that day from a combination of the dividend reinstatement, and a stock buyback announcement.
Delta Air Lines also reinstated a dividend after troubles with solvency. The airline's 2005 bankruptcy wiped out former shareholders, but the restructured Delta has been a top performer in the airline industry in recent years. With major reductions in net debt, and a plan to cut fuel costs through a refinery purchase, Delta decided that a dividend and buyback program would be another way to benefit shareholders. When the dividend was officially declared, Delta shares rose around 3% on the day.
Can the market see it coming?
It didn't take thousands of hours of research by highly paid financial analysts to discover that GM, Delta Air Lines, and AIG would be reinstating their dividends soon. In fact, I noted the strong likelihood that these dividends would be reinstated prior to any official dividend declaration in this article on AIG and Delta, and this article on GM.
Rest assured, I'm not psychic. In fact, finding out that these companies would reinstate their dividends was just as simple as keeping up to date with company news. Reinstating a dividend is not some corporate secret plan designed to take the market by surprise; rather, company officials will often telegraph their moves ahead of time.
For companies that have suspended their dividends, the resumption of a dividend is a sign of progress in many investors' eyes. Once company officials know they plan to reinstate a dividend, few are shy about sharing. In the cases of AIG, Delta, and GM, investors were told well in advance through various company sources.
Finding the next dividend reinstatement play
Over the past year, investors have benefited from the rise in the share prices of AIG, Delta Air Lines, and GM, with added boosts when the reinstatement of the dividend was officially confirmed through a dividend declaration.
In a forthcoming article, I'll try to answer why the market hasn't been pricing in these events that are expected well ahead of time. I'll also note one company that has already told the market of its dividend reinstatement plans and, if it's like the three companies mentioned here, could see a pop of its own once an official dividend is declared.
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The article How to Profit From Dividend Reinstatements: Case Studies originally appeared on Fool.com.Alexander MacLennan owns shares of Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $34 calls on General Motors, long January 2015 $40 calls on General Motors, long General Motors Class B warrants, long General Motors Class C warrants, long January 2021 $45 AIG warrants, long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. The Motley Fool recommends American International Group and General Motors. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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