Dividends Show Herbalife Won't Bury Ackman

February 15, 2013 11:46 am
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In the Wall Street equivalent of wrestling’s Royal Rumble, Pershing Square Capital founder Bill Ackman is taking on all comers with regards to a massive short position in nutritional supplement maker Herbalife (NYSE: HLF).

It is not just Carl Icahn, who as most of the investing public by now knows, took an almost 13 percent stake in the company in the fourth quarter. It is Dan Loeb and Robert Chapman. Even Ken Heebner’s Capital Growth Management is now long Herbalife.

In fact, during the fourth quarter, Heebner dumped Google (NASDAQ: GOOG) and bought shares of the company Ackman says is a pyramid scheme.

In other words, a fair amount of folks with deep pockets want to burn Ackman. If they share much in common with Icahn, it can be argued that they have taken stakes in Herbalife perhaps due to the fact that they do not like Ackman more than they like the stock. Thanks to a late January CNBC tussle between the two, those not living in a cave now know Ackman and Icahn really do not like each other.

With Ackman heavily short Herbalife, the possibility certainly exists that Icahn, Loeb and friends could put the hurt on Pershing Square. Pershing Square is short 20 million shares of Herbalife, accounting for 56 percent of the short float in the name as of mid-January, Reuters reported, citing Nasdaq short data.

While Pershing Square’s average price on the Herbalife short is not known, Ackman previously confirmed he initiated the short in May 2012 when the shares traded around $45. For much of May and the first half of June 2012, the stock stayed around that area before advancing to the high $40s in the back half of June. The stock would proceed to trade around or above $50 for much of July and August.

In other words, it is not an unreasonable to speculate (unfortunately, that is all it is, speculation), that even with Herbalife trading over $42 as of this writing that Ackman is either slightly profitable on this trade or not far from being there.

Overlooked is the protection against a major short squeeze that Pershing Square’s portfolio has. It is believed that Ackman has not covered any of his short position in Herbalife. However, even if Icahn, Loeb, et al. run the stock higher, that probably will not spell the end of Pershing Square.

Dividends explain why. As in Pershing Square’s holdings generate a fair amount of dividend income. Of course, some of that is offset by the hedge being short 20 million shares of Herbalife, itself a dividend paying stock.

Assuming no adjustments to his position and no dividend increases or decrease by the company, the next time Herbalife pay its quarterly dividend (probably early March), Pershing Square is on the hook for 30 cents a share. That works out to $6 million (20 million shares x 30 cents = $6 million).

However, Pershing Square will adequately cover that tab through other positions. For example, at the end of last year, the hedge fund owned nearly 29.5 million shares of Procter & Gamble (NYSE: PG).

P&G paid a dividend of 56.2 cents per share last month, meaning a $16.5 million payday for Pershing Square, assuming no shares were sold in January before the dividend was paid. Then there is the Beam (NYSE: BEAM) stake. Pershing square owned just over 20.8 million shares of the spirits maker at the end of Q4. The company paid a dividend of 22.5 cents a share earlier this month. That works out to be $4.68 million.

Do not forget about Canadian Pacific Railway (NYSE: CP). Ackman’s fund held over 24.1 million shares of that stock at the end of Q4. Round that dividend down, call it 35 cents a share and the next time the company pays it (probably early March), Pershing Square is going to rake in $8.43 million.

Pershing Square also held a whopping 74.7 million shares of General Growth Properties (NYSE: GGP) at the end of last year. That company recently raised its quarterly payout to 12 cents a share.

Again, assuming no changes to Pershing Square’s position, when General Growth pays that dividend in late April, the hedge fund is going to get another $8.96 million. Burker King (NYSE: BKW), another Ackman stock, is not much of a dividend payer, but Pershing Square’s 38.3 million-share stake in that company will be good for another $1.53 million upon the payment of the next dividend of four cents per share.

It is important to note that for the purposes of this exercise, Pershing Square’s stakes were rounded down. For example, the hedge fund owned exactly 27,946,892 million shares of P&G at the end of last year. What that means is the fund’s dividend income, assuming no sales of shares, will be higher than what is being projected here.

The exercise also assumes no dividend increases from either Herbalife or Ackman’s long positions going forward. However, that is unlikely because, P&G as just one example, has raised its dividend every year for more than five decades.

Adding up the dividends on Ackman’s long positions results in an estimated $40.1 million coming in when these firms pay next pay their dividends. Take $6 million out for Herbalife, and Pershing Square still has over $35 million coming in quarterly income. Assuming no dividend increases or cuts, that is $140 million in annual dividend income (figure reflects paying Herbalife’s dividend).

For the sake of argument, assume $43 is the average price at which Ackman shorted Herbalife. In theory, annual dividends would allow him to stay in the stock until at least $50. Meaning Icahn and company need to run the shares by about 16 percent from current levels. Not impossible, but destroying Ackman here is unlikely. Dividend math says as much.

For more on the Herbalife saga, click here.

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