RealNetworks (RNWK) will be issuing special dividend of $1.00 per share to all shareholders who own the stock at the close of business today. The actual payout will occur in two weeks.
This dividend represents more than 33% of RNWK’s market cap. Because of the tax treatment investors are poised to make upward of 8% OVERNIGHT on this deal.
Here’s why: The tax rate on dividends is 15%. Thus, anyone who receives the RNWK dividend will pay 15 cents in tax for every share they own.
However, the $1.00 dividend should cause the stock to drop by $1.00 tomorrow. That will trigger a capital loss tax credit, which investors will use to offset taxes on other income. For some, this tax credit will exceed 40%, or 40 cents per share (for example, someone in the 35% tax bracket who lives in Massachusetts, where the state capital gains tax is 12%).
The net effect is a 40-cent tax credit, minus a 15-cent tax payout ... or 25-cents of net-benefit for every share of RNWK owned. With the stock sitting under $3, this 25-cent benefit means that investors will earn more than 8% by owning this stock tonight.
I predicted tonight’s dividend over a year ago (see the Seeking Alpha article RealNetworks: Exceptional Value at Current Levels).
Beyond tonight, investors have a lot to be excited about.
First of all, the company is selling for book value, which limits investors’ risk. Secondly, the company owns nearly 50% of Rhapsody, which is one of only six companies in the world with an on-demand license with the major record labels. With Facebook Music rolling out, these licenses should skyrocket in value, due to their unique ability to enable social music sharing. Finally, management is actively making moves to increase shareholder value. Tonight’s dividend is just one step in that direction.
As icing on the cake, RNWK will be meeting with investors and institutions at two conferences this week. It starts tonight at the Morgan Keegan 2011 Technology Conference in New York City. On Thursday, RNWK will be presenting at the Canaccord|Genuity Growth Conference in Boston. Investors can listen to the webcast of both presentations here.
With its special dividend, book value, and numerous paths to unlocking its true worth, shares of RNWK remains an exceptional value at current levels.
Disclosure: I am long RNWK.