I have had this ongoing theory that the market is bidding up yield-bearing assets beyond what is rational.
Nothing is as good an example as today when a small asset management firm, Integrated Asset Management (TSX: IAM) announced that they were resuming an annual dividend – 4 cents a share.
IAM is a very illiquid company, but I have had the advantage of considering them as an investment candidate a couple years ago, but never invested because of valuation (too high). This turned out to be a money-saving decision (notwithstanding the economic crisis!). They had previously given out 4 cent dividends on a semi-annual basis (which was unsustainable), but in order to build up their equity they suspended dividends in early 2009.
Their balance sheet otherwise is quite clean – they have a small cash cushion (about 36 cents a share) and no debt.
Yesterday, the company closed trading at 62 cents a share on 1,500 shares of volume (that is about CAD$930 that traded hands, which is about half of its historical daily volume). Today, they are presently trading at 90 cents a share, and I see about 135,000 shares that have changed hands.
Suffice to say, a 45% price increase because of a dividend announcement is a good indication that the market is valuing yield above everything else.
In terms of actual valuation, it was my belief that before this announcement that IAM was trading at the lower end of my valuation range, but not quite at “buy” territory. In addition, the illiquidity would have made it prohibitive to accumulate a position with any speed and thus illiquidity translates into a lower valuation.
The company itself is an asset manager – they claim to deal with “alternative assets”. At the end of their last quarterly report, they reported nearly $2 billion of assets under management. Their year ends on September and 2009 was a very poor year for them, but it was also the case with every other financial institution. In a more “regular” year, the company should be earning around 6 to 7 cents a share, so their dividend payout schedule will be around 2/3rds of their income.
The dividend announcement shouldn’t change what the company earns, so it is puzzling to see it rise so much after the announcement. It also makes you wonder how many other yielding securities have their prices elevated strictly due to dividends and income distributions, rather than earning economic profits through their operations.
An astute trader can also try to time these announcements in other securities. I will leave this to an exercise for the reader.