[Editors’ Note: The author made an error in calculating yield using post split distribution and pre split share price. The title erroneously stated 16% yield, but has now been corrected to 8%.]
In this article, I will discuss the high yielding Alpine Total Dividend Fund (AOD) and what the announced reverse split means for investors. I will discuss what to expect, what will happen and how to trade pre-split.
The bull market of the last few years has taken a slight breather to start 2014, but seems to be ramping up again. We are certainly due for a correction, or overdue really. This bullish action has caught many bears in a trap, forcing them to cover shorts for substantial losses, furthering the bull market buying. Some bearish funds have been decimated because of this action. For example, Direxion recently executed a reverse share split of its popular 3x leveraged bear fund, the Direxion Daily 3X S&P 500 Bear ETF (SPXS), which aims to provide a 300% return inverse to the moves in the S&P 500 Index. Volatility funds have not escaped either as volatility has been nearly absent, compared to historical levels, for the last two years. As such, the iPath S&P 500 VIX Short-Term Futures ETN (VXX) underwent a 1 for 4 reverse split, and the ProShares Ultra VIX Short-Term Futures ETF (UVXY) underwent a 1 for 10 reverse split. A few months ago the Direxion Daily 3x Small Cap Bear ETF (TZA) underwent a 1 for 4 reverse split as well.
What is often not done is a reverse split on stocks that are doing well. Generally they occur to keep a stock from being delisted from an exchange (e.g. penny stocks that need to be over a buck) or are done after reaching numerous new 52 week lows under $5.00. In the case of AOD, the stock is at its 52 week high. Things are going swimmingly, as management is also increasing the monthly distributions to AOD holders by 4.6%.
When The Reverse Split Will Take Place And What Will Happen to Your Position
No other popular high yielding monthly dividend fund will be impacted by this split, but some of Alpine’s other products will be adjusted as well. The AOD reverse split will be conducted at a ratio of one new share for every two held. The reverse split will apply to shareholders of record as of the close of the markets on January 20, 2014 and will begin trading at the adjusted price January 21, 2014. The ticker symbol for the fund will not change but will receive a new CUSIP number.
The reverse split will increase the price per share of the fund with a proportionate decrease in the number of shares outstanding. In a 1 for 2 reverse split, every two pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced twice higher than the value of the pre-split share. (For example, if you hold 100 shares of AOD priced at $$4.00 each, then after the reverse split you will hold 50 shares valued at $8.00 each.) Thus, the reverse split does not change the value of a shareholder’s investment. Again, the ticker symbol for the fund will remain the same even with the new change in price. The only change on paper for the fund is that it will be issued a new CUSIP number, which identifies the product on exchanges. There are two more considerations to think about during this split.
The Reverse Split Could Result in Fractional Shares
Shareholders who hold quantities of shares that are not a whole number with an exact multiple of the reverse split ratio, the reverse split will result in the creation of a fractional share. This will affect any shareholder who does not hold a number of shares that is a multiple of two. After the reverse split occurs fractional shares will be redeemed for cash and sent to your broker of record, generally within two weeks post-split. The major issue associated with such a move is that it forces shareholders to realize either super tiny gains or losses, which could result in an annoying taxable event for those shareholders, in addition to having a potential loss on investment if prices are below where they were purchased. Granted, this is more of a formality to pester shareholders rather than any kind of meaningful financial impact, however, it is relevant and needs to be mentioned. One way to mitigate this fractional share issue is to purchase more shares to round out your AOD holdings to a multiple of two, or to sell an appropriate number of shares to round out the holdings. An example would be if you held say 497 shares. Post-split you would be given 248.5 shares, but that half share will be dissolved and you will be credited with cash.
What I Recommend For Those Holding Common Stock
This reverse split won’t change the value of your investment. However, it will make the shares trade well above $5.00. The yield you will receive won’t change (actually it’s going up with a scheduled dividend increase). The key with this reverse split is that it will reduce volatility further on a stock that doesn’t have high volume. This creates a layer of safety. Further, many mutual funds and hedge funds have policies not to own shares of anything on the books under $5.00. That said, after the split the fund will trade over $8.00, and could draw in larger institutional and hedge fund money. If you are holding the stock, I wouldn’t sell into this, unless you were already planning to. If you are on the sidelines and want to get in, I would recommend buying ahead of the split to take advantage of the potential for less volatility and large money who could come in and buy the fund.
What About Options Contracts?
I generally recommend dumping options contracts before the split because although options values won’t change, volume dries up and bid/ask spreads widen. That said, AOD currently does not have options contracts available for trading so I will not delve further into this matter.
The Dividend is Heading Higher
I mentioned that the fund is raising its dividend. The split will not affect anything. What will happen is that the dividend will double as the number of shares you own is cut in half. That said, in a sign of strength, starting with the January distribution the monthly payout per share will be 5.65 cents per share. If there was no increase, then post split the fund would pay only 5.4 cents per share. This is another reason to buy ahead of the split.
AOD is just about at a 52-week high, currently trading at $4.25. To bring the product to an investment price that management believes is more stable for investors and could attract institutional investment, it is conducting this reverse split. The reverse split of shares only really negatively impacts investors who own common shares at a total that are not a multiple of two, as they will be forced to sell fractional shares at a loss, or a potential gain, that could result in a miniscule but annoying taxable event. No options contracts exist to worry about. While the overall investment value does not change from this reverse split for those holding common shares, the only benefit is that a higher share price may attract new money, compared to the sub $5 price AOD carries now. With the announced dividend increase and the potential new money, I recommend those who want to buy into AOD do so before the split.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)