March 31, 2008

  

Cal-Maine offers generous dividends to deter short sellers

 

 

Cal-Maine, the largest US egg producer is giving up to a third of its quarterly profits to shareholders and is planning to do so from now on.

 

Portfolio managers predict the plan could penalize short sellers who have been piling into Cal-Maine's shares.

 

Cal-Maine reports fiscal third-quarter earnings on Monday. Two portfolio managers who own Cal-Maine stock estimate it earned at least US$2 a share in its most recent quarter, bolstered by lofty egg prices in a moderately supplied market.

 

Based on that calculation, investors could be paid a dividend of 67 cents for each share they own, a huge step up from a 5-cent annual dividend that Cal-Maine used to deliver.

 

"By far, it will be a record quarter," said John Davenport, president of Priority Capital Advisors LLC, which owns Cal-Maine shares and has long followed the company. "Egg prices have been incredibly strong and are still elevated."

 

Cal-Maine unveiled its new stock-dividend policy late last year, explaining that the change aims to more closely reflect the cyclical nature of the egg business.

 

It is an especially sweet deal for Chairman and Chief Executive Fred Adams Jr., who owns more than 6.5 million shares, or at least 30 percent of the company.

 

Another beneficiary could be Goldman Sachs Group Inc. (GS). In a Feb. 1 regulatory filing, Goldman revealed owning more than 5 percent of Cal-Maine's outstanding stock, or 1.3 million shares.

 

The new dividend strategy "may also be a plan by the company to bring the short interest down," said Brian Culpepper, portfolio manager for the James Small Cap Fund (JASCX), one of Cal-Maine's stockholders.

 

There is an important catch with the dividend.

 

Investors who have shorted the stock will be obligated to pay the dividend sum for each share they shorted even if they close out their position before the dividend is paid, said Bob Auer, senior portfolio manager for the Auer Growth Fund (AUERX).

 

"This could be the mother of all short squeezes unfolding," Auer said.

 

Short sellers are investors betting that a company's stock is set to drop.

 

As of March 14, the number of shares sold short had surged to 12.4 million, up from 6.8 million at the end of 2007, according to Nasdaq trader data. This amounts to 57 percent of Cal-Maine's outstanding shares.

 

Cal-Maine's skyrocketing stock price may explain why short sellers are waiting for the company's fortunes to fall. The stock is up about 175 percent in the past 12 months.

 

Davenport at Priority Capital said he would be wary of buying the stock at these lofty levels.

 

Still, he suspects investors who have shorted the stock "don't quite have an appreciation for how strong the underlying numbers are...the numbers are going to be strong this quarter and next."

 

Davenport made money shorting Cal-Maine's stock in 2004 during the last boom cycle for egg producers.

 

He estimates the company will earn US$6 a share for its fiscal year that ends in May. In fiscal 2004, Cal-Maine's last banner year, it earned US$2.73 a share.

 

"It's an entertaining stock," he said. "It will be interesting to see how the stock reacts."