Recently I wrote about the potential for a short squeeze in shares of Sirius XM (SIRI) due to the recent declaration of a one time special dividend of $0.05. With an ex dividend date of December 14th and a pay out date of December 28th, these become two dates for Sirius XM investors to keep in mind.
First, the ex dividend date of December 14th is important because of the reasons explained within my article here. Namely, shorts will be on the hook to pay the dividend on the borrowed shares. Because a short holder borrows his or her shares, they create a situation where there are essentially two owners for those sets of shares, the person the short borrowed from, and the person the short sold to. Since Sirius XM will be paying out $0.05 per share outstanding, and since shorts create a surplus of shares, shorts must cover this difference they have created. There is the distinct possibility that this creates short term buying pressure and shorts may not wish to be on the hook for a cash payout.
The next date to also keep in mind is December 28th. Why? Because this is the date of the dividend payment. On this date every owner of Sirius XM shares will be paid $0.05 per share held. There are a few courses of action the recipient can then take.
Consider an investor with 30,000 shares of Sirius XM on December 14th. Now consider that this individual will be receiving $1,500 on December 28th. This investor may do one of the following:
- Take the $1,500 dividend in cash and do nothing with it. Effect? None.
- Take the $1,500 dividend and either automatically or manually reinvest it in more shares of Sirius XM. Effect? Buying pressure.
There will certainly be a portion of individuals who take course number one, and a portion which take course number two. Depending on your sentiment you may lean more heavily towards one or the other.
Me? I'm thinking that more investors will choose route two. This is what I will be doing with my dividend on or around December 28th. The effect here could very well be considerable buying pressure on the dividend payment date, and that's something investors should make note of. While it is only a $0.05 dividend per share, that is a payout of hundreds of millions of dollars, and that money has to go somewhere.
Why do I feel that most investors will choose the route of reinvestment? This is a relatively small dividend in terms of percentage, and I do not feel that many people will be or have been buying shares of Sirius XM for a one time payout of $0.05. Were the dividend $0.50 I'd expect considerable selling pressure after the ex-dividend date. At 5 cents the payout is less than the share price swings low to high on an average day of trading. Because of this I expect much of the payout to go to those who are long, and longer term, investors in Sirius XM.
Between automatic reinvestment plans, as well as manual purchases, I think December 28th and days afterwards could see increased buying pressure. With downside likely limited by Sirius XM's impending $2 billion in share buybacks, as well as the continued strong performance of the company, reinvestment seems like a very smart move to me.
Disclosure: I am long SIRI.