Holders of Great Northern Iron Ore Trust Will Lose 30% Of Their Money In 7 Months

09/09/2014 at 6:00 PM

There are a group of investors that look to capture dividends of high yield stocks. However, what they fail to realize sometimes is that trusts that terminate in the near future can be very overvalued. Investors can lose much more in share price depreciation than they receive with the dividend. This is the case with Great Northern Iron Ore (GNI). It’s a royalty trust that has its final dividend payout in March 2015 before it closes.

The details about GNI can be found in Seeking Alpha articles here and here. The situation is actually very simple, and it was confirmed to me by GNI’s CFO. At any point from now until March, the share price can collapse. Dividend chasers are playing Russian Roulette with their money.

I spoke with Thomas Janochoski, the VP and CFO of GNI, last week. He’s very friendly and is the one who answers the phone at this number: (651) 224-2385, which can be found here. He confirmed to me that the company doesn’t expect the remaining three quarterly dividends to be more than last year’s dividends, or averaging $2.50 apiece. So far this year, the company is on track to match historical 2013 dividends. Both the March 2013 and 2014 dividends were $2.25, and both the June 2013 and June 2014 dividends were $2.50.

He also said that the company’s expected liquidation payout, to be paid at the end of 2016, if anything will belower than the company’s estimated amount of $9.72, since there will be a lot of “wind down” fees. So, at best, shareholders can expect to receive a total payout of: $2.6 + $2.65 + $2.25 + $9.72 = $17.22.

An additional advantage for short-sellers, is the end of 2016 is more than a year and a half after the final dividend. Most GNI longs won’t want to tie up their money for that long, and will sell their shares before the stock disappears in April 2015.

The Upcoming Catalyst

GNI’s share price has plummeted significantly more than its dividend on the ex-dividend date for the past four quarters. Therefore, the catalyst to a short position is to short the stock now, and wait till the ex-dividend date of around September 26th. If the stock falls right before ex-dividend, like it did last quarter, then you can cover before the ex-div date. Or you can just hold the short through the ex-dividend date. You’ll have to pay the dividend of $2.60, but the stock should fall $6 or more. The following chart tells the story for the last two quarterly dividends:

(click to enlarge)

As shown in the above chart, the stock rose to around $24-$25 right before the ex-dividends in the last two quarters, and then plummeted to around $18 or below each time. It’s already at above $24 again. However, people should realize that after every ex-dividend date for GNI, the stock is worth less and less. The dividends paid out is money that the company will not earn back. Therefore, after this next dividend, fear should start to grip investors more, and the stock will likely fall below $18, and perhaps even below $16.

The pattern before the previous two dividends is the stock went as high as $24. But this will change going forward. There’s no way it will be trading for $24 right before the final dividend in March. None of us truly know when the trust will collapse to its true value (of below $15 after the September dividend), but it’s a certainty that it will happen within the next six months.