Seeking Alpha
Special situations, event-driven, arbitrage, activist investor
Profile| Send Message|
( followers)  

It is well known that stocks that pay a decent dividend (2% plus annually) will often climb higher in the days before their ex-dividend date. Sometimes when the stock is thinly traded, the pre-dividend advance can dwarf the size of the actual dividend. Such is the case with Tompkins Financial Corp (TMP).

Tompkins closed at $40.50 on Tuesday January 24, the day before the dividend was announced. The next day the $0.36 dividend was announced (3.55% annualized yield) with an ex-dividend date of February 2, and the stock closed at $41.

On Thursday, however, TMP said in a press release it will acquire VIST Financial (VIST) in a share exchange transaction where shareholders of VIST will receive .3127 shares of TMP for each VIST share they own. VIST has 6.6 million shares outstanding, which means TMP will have to issue 6.6MM X .3127 = 2.06 million new shares for the purpose of the merger. As TMP currently has 11.1 million shares, the new 2 million shares will dilute TMP shareholders equity by almost 20%.

Such news is always very negative for the price of the acquirer, as merger arbs will buy the target company (in this case VIST) and sell short the corresponding number of acquirer stock to lock in the spread. Some traders will enter straight short positions, as the acquirer's stock will inevitably go lower as a result of the arbs' hedging and the coming dilution of acquirer's equity.

Not surprisingly, after the merger news, TMP started falling, reaching a low of $39.30 on Friday afternoon. On Monday, January 30, TMP opened above $40 but quickly was pushed down to $39.80 as short selling continued. At this point however dividend investors started buying in with some decent volume. Note that this is a stock that only trades 30,000 shares daily on average.

Just a few thousand shares pushed TMP back above the open price of $40.09, at which point the short sellers started panicking to cover, but there were no shares to be had of this thin stock, as they were competing for the stock with the dividend investors. This led to an epic short squeeze, where the shorts finally capitulated at higher and higher levels. It only took 90,000 shares to push TMP $3 higher ! It reached $43 by 3pm EST the same day.

At these prices buying the stock of Tompkins, which has advanced $3.50 since the dividend announcement to receive the $0.36 dividend is pure madness. Dividend investors who bought the stock at $40 or $41 this morning were lucky to see TMP explode as it did. It may very well continue rising some more over the next day or two. Starting on the ex-dividend day of February 2 however, there is no longer any reason to buy the stock as you would not be receiving the dividend.

What's more, one could actually sell TMP on February 2nd and still receive the dividend. Hopefully on that day TMP is still trading at the current extremely high levels so dividend investors can get out without a loss. More likely though the stock will already be lower than $43 perhaps as much as a dollar. TMP will only continue lower from that point as there is absolutely no reason to buy the stock ex-dividend especially as it is about to issue 2 million new shares.

In my opinion dividend investors who have seen a gain of $1 to $2 on Monday should do well to take the profit immediately and forego the $0.36 dividend altogether. Under no circumstances should anyone buy the stock at these levels, i.e. $42-$43 for the dividend as TMP is almost guaranteed to fall back to $40 or even lower within days of the ex-dividend date. In fact, as "squeezing" works both ways I wouldn't be surprised if panicked investors push the price well below $39.

There is only one scenario where TMP could continue climbing after the ex-dividend date. If the merger was to fall apart, then all the arbs who sold short TMP to lock in the spread will rush to cover. The only way this could happen is if the Fed which has to approve all bank mergers decides to ban this transaction for some reason. Not only there is no anti-trust or other reason to stop two small banks from merging but upon the successful completion of the deal TMP will pay back the government's TARP investment in VIST.

Considering this is an election year and the government wants the TARP program to look like a good idea and not like squandering taxpayers' money, I see the chances of the Fed blocking this deal as zero. This has been the case with at least half a dozen other bank mergers that I have followed in the last few months.

Source: Why Tompkins Financial Is Not A Good Dividend Play