McAfee Corp. Special Stock Dividend
A week ago, I saw some news that McAfee Corp. would be giving a special dividend of $4.50 and from that news sprang this idea.
Company Introduction:
McAfee Corp. is a cybersecurity software company headquartered in San Jose, USA. The company provides antivirus, cloud, and endpoint security solutions to consumers, enterprises, and governments. The company has a long history - but to keep it short. In 2011 it was bought by Intel for $7.7 billion. In 2017, McAfee officially spun out of Intel and became a standalone security player again. The new owners with a majority stake at 51% share are private equity firm TPG Capital. Another PE firm, Thomas Bravo, has also joined as a minority investor through an agreement with TPG. Intel was still there with a 49% share. This valued the company at $4.2 billion. Then in October 2020, McAfee went public again.
The idea:
On March 8 2021, McAfee released a report announcing the sale of its enterprise business to Symphony Technology Group for $4.0 billion (before tax).In other words, McAfee is purely focusing on consumer cybersecurity. I believe this report highlights a few interesting things about the company's future earnings release.
The main part of this report is the special dividend of $4.50. That McAfee is going to be giving to shareholders ex-dividend 12/08/2021. This dividend at current market price of $28.30 represents a 15.90% dividend rate pre-tax. At the closing sale price on March 5 2021, before McAfee’s entry into the transaction, the dividend rate was 21%.
When this report came out on March 8, the stock gapped up by 12.63% to close. Recently, the news broke again of this special dividend on 3 Aug. From then till 6 Aug, the stock went up by 14.42% to the new stock high. The stock had a sell-off of around 15% then rose again after yesterdays earnings report by about 10%.
So the idea is simple, buy the stock at the latest time possible and sell it on the ex-dividend immediately when the market opens to profit the $4.50 dividend.
For one to buy this stock, just to profit from the dividends, there are a few things one should know and understand
The ex-dividend date is the date on which the stock begins trading without the subsequent dividend value. This means investors who purchased the stock before the ex-dividend date, for McAfee that is 12 Aug, are entitled to the dividend. While those who bought after the ex-dividend date are not. As long as you sell on the ex-dividend date or after you will receive the dividend.
But, there are a few problems, doesn’t this seem too good to be true?
All one would have to do is buy the stock on Wednesday (11Aug) and sell it on Thursday (12 Aug) when the market opens for a nice profit of 15%. This all seems a bit too easy if you ask me. So I think the further analysis is warranted.
The problem I see is, one buys the stock on Wednesday before market close and sells it quickly on Thursday when the market opens. But, what if everyone has the same idea? Or what if everyone is planning on selling when the market opens? If some individuals or institutions have access to the pre-market, which my broker doesn’t. Then they will have an advantage in selling. The volume in pre-market is not going to be sufficient for big money. The volume for McAfee stock is 968,157 and the average volume is 851,189 (10/08/2021). In the pre-market, that’s probably going to be even smaller. So, the liquidity isn’t going to be big for the sellers on Thursday pre-market. But, by doing a simple calculation we can see why this is still a worry even with the regular trading session.
For example:
If we have $1,000 to invest in McAfee stock. If we buy now at the current market price of $28.34 we will own 35.30 shares. The dividends that we will expect are $159.75 pre-tax. That represents, what one could call, a 15.98% return on investment. That’s only if the buy and sell prices are the same. If the stock falls to $25 (-11.79%) when the market opens, and it takes someone a while to sell their shares. There will be a loss to take into account. The loss would be $117.85. So the overall return on investment would be $41.90 (4.19%) pre-tax. To some, the risk may not be worth the reward.
This is just an example. But, it shows that if the stock price falls too quickly and too low before one could sell their stock, the dividend payment may not be worth it.
So, before one precedes this trade, two important things need to be established.
Did investors just buy the stock for the dividends.
How much will the stock fall, if it will, on Thursday market open.
I say if because McAfee earnings came out better than expected. Since earnings are good, the stock has risen by around 10%. So maybe investors may not sell on Thursday opening, but a lot of retail investors may because they don’t care about the long-term perspective of the stock.
Also, now that the stock has risen, many may see that as a good opportunity to get out of the market and sell Thursday morning. As you can see on the chart there was a sell-off when the stock reached a new high.
Theory one (Have people just bought the stock for the dividends?):
One easy way to tell if people have bought the stock just for the dividends is to see how the stock has performed after the dividend announcement was made. But that’s not what I’m going to do, March 8 was nearly 5 months ago and in that time the stock has moved quite a bit that could be related to other factors or just normal stock behaviour.
So, it is better to look at the recent announcement that was 3 Aug. From that day to 6 Aug the stock went up 13.75%.
From 4 Aug the historical volatility has shot up by almost 163% to date. So this isn't normal price movement behaviour. So, my guess is the retail traders found out about the dividend on 3 Aug or other investors thought that the best thing to do is buy the stock closest to the dividend as possible to minimize risk. However, the accumulation/ distribution indicator from 3 Aug to 5 Aug there wasn’t much of a big jump in stock accumulations. In fact, from 5 Aug onwards, the accumulations of stock have been falling and more people have been selling the stock.
So, even tho the Accum/Distru indicator may signal selling. I believe the stock has been bought simply for the dividends in the last week. The only problem I see is the sell-off that occurred from 9 Aug – 10 Aug. It doesn’t make sense, why would someone sell the stock days before the special dividend? It may be because they may not care or the stock price reached the new high and they thought now was a good time to get out or maybe they are anticipating a large sell-off on 12 Aug and don’t want to be a part of it, even if there's a dividend involved.
This leads to my second theory (will the stock fall on Thursday opening?)
In my opinion, I believe the stock will fall on Thursday morning, I believe people have in the last week largely bought the stock for the dividend. The only thing that could disrupt this theory is the fact that the earning was good. The stock went up around 10% because of it.
So maybe people will just sell tomorrow and were simply buying in for the good earning stock rise. Or they see that the stock could be good long-termly. If the latter is the case then the stock may not fall that much on Thursday morning. Also, just a quick mention but as of 10/08/2021, according to Yahoo Finance the major stockholders are:
1.26% held by insiders
97.21% held by institutions
98.46% of float held by institutions (this is all the shares on the open market)
173 Number of institutions holding shares
The reason I highlight the float shares is that they are largely held by institutions, this can lead to two scenarios. The stock can have less volatility because the institutions have more money and can’t be selling that quickly if they won’t too and this large money can “stabilise” the stock. The second is because the institutions hold so much money, when they do sell, it isn’t going to be nice. This can lead to a volatility risk for investors if they don’t know how the institutions are going to react. So the stock may not fall as much if the institutions don’t want to sell but I would still be wary of the retail investor's actions.
This leads to my next issue, is the stock good enough for a long-term buy? Because if it is then the stock may not fall as much on Thursday.
In the March 8 report, one important thing along with the special dividend announcement was that McAfee expects to reduce debt by approximately $1 billion, which is expected to result in a neutral impact to net leverage ratio (which measures the ratio for a business’ debt to earnings, it reflects how long it would take a business to pay back its debt if debt and EBITDA were constant). If McAfee reduces debt then to maintain a constant ratio, its EBIDTA has to fall as well by the same relative amount. So, when the transaction closes by the end of 2021, you can expect, ceteris paribus, the earnings of McAfee to fall in the next one maybe two years. Unless the consumer business side picks up, I doubt the earnings are going to be good for the next couple of years. However, the consumer part of the business is growing faster than the industry average. So is this. Along-term buy or not, to be honest, I don't know. But, I'm hoping the stock doesn't sell off tomorrow but to be honest I am expecting it too.
To conclude, I expect the stock to fall on Thursday morning after everyone who bought for the dividend sells their stock. This makes the special dividend a risky endeavour but it could pay off if one does it correctly by selling as quick as possible.