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:
It is not just Carl Icahn, who as most of the investing public
by now knows,
took an almost 13 percent stake in the
in the fourth quarter. It is Dan Loeb and Robert Chapman. Even
Ken Heebner's Capital Growth Management is now long
In fact, during the fourth quarter, Heebner dumped Google
and bought shares of the company Ackman says is a
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
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
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
. That works out to $6 million (20 million shares x 30 cents = $6
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
of Procter & Gamble (NYSE:
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:
) 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
Do not forget about Canadian Pacific Railway (NYSE:
). 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:
) at the end of last year. That company recently
raised its quarterly payout to 12 cents a
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:
), 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
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
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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