Egg producer Cal-Maine pumps up dividend
Lavish payout plan aims to drive out short-sellers
By Matt Andrejczak, MarketWatch
Last update: 12:06 p.m. EDT March 28, 2008Print E-mail RSS Disable Live Quotes
SAN FRANCISCO (MarketWatch) -- It's not often a company returns a third of its quarterly profit to shareholders. But thanks to a new dividend policy, egg producer Cal-Maine Foods Inc. plans to do just that for each and every profitable quarter from now on.
The payout should pack a punch. What's more, portfolio managers predict the plan could penalize short sellers who have been piling into Cal-Maine's shares.
Cal-Maine (CALM:Cal-Maine Foods Inc
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Last: 34.46-0.73-2.07%
12:00pm 03/28/2008
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CALM 34.46, -0.73, -2.1%) , the largest U.S. egg producer, reports fiscal third-quarter earnings on Monday. Two portfolio managers who own Cal-Maine stock estimate it earned at least $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's an especially sweet deal for Chairman and CEO Fred Adams Jr., who owns more than 6.5 million shares, or at least 30% of the company.
Another beneficiary could be Goldman Sachs. In a Feb. 1 regulatory filing, Goldman revealed owning more than 5% of Cal-Maine's outstanding stock, or 1.3 million shares.
The new dividend strategy also "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:James Adv:Small Cap
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Last: 20.14-0.31-1.52%
6:04pm 03/27/2008
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JASCX 20.14, -0.31, -1.5%) , one of Cal-Maine's stockholders.
And there's 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:unified ser tr auer growth fd
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6:02pm 03/27/2008
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AUERX 9.21, -0.12, -1.3%) .
Squeezing shorts
"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, rather than pop.
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. The number is staggering: It amounts to 57% 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% 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've 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 $6 a share for its fiscal year that ends in May. In fiscal 2004, Cal-Maine's last banner year, it earned $2.73 a share.
"It's an entertaining stock," he said. "It will be interesting to see how the stock reacts."
Matt Andrejczak is a reporter for MarketWatch in San Francisco. |
