Great Northern Iron Ore (NYSE: GNI) is widely misunderstood. Investors buy the stock for income, yet fail to realize that the underlying investment is a trust that will liquidate on April 6, 2015. In the most optimistic scenarios, distributions from now until liquidation will total less than $70, yet the company currently sells for about $100. Anyone who holds from today until liquidation will lose 30% or more.
Adding to the confusion is the fact that Yahoo! Finance has reported GNI's dividend yield in an inconsistent way that sometimes gives an exaggerated idea of the stock's income potential. On March 9, Yahoo! Finance reported that GNI, then priced at $102, had a yield of 22.8%. For a stock that's going dark in 3 years, any yield under 30% is inadequate. Even so, a reported yield of 22.8% will turn some heads.
But is the yield really 22.8%? Eleven days later, on March 20, Yahoo! Finance reported that the yield was just 9%.
What happened? The problem is that Yahoo!'s dividend yield calculator isn't designed for companies like GNI. Yahoo! takes the most recent quarterly dividend and multiplies it by four to get an annual dividend. This works well for most companies, which pay out in four equal installments, but GNI isn't like most companies. GNI's distributions are seasonal. GNI pays a large winter distribution, and then smaller distributions in spring, summer, and fall.
GNI's last dividend of 2011 was $5.75, a record. Yahoo! quadrupled that amount to get an annual dividend of $23, even though GNI has never paid $23 in annual dividends-and probably never will. On March 9, GNI announced that its spring 2012 dividend would be a more ordinary $2.25, the same as in spring 2011. So Yahoo! quadrupled that to get an annual dividend of $9 - even though $9 would be the smallest annual distribution since 2009.
Yahoo!'s dividend formula simply doesn't work for a seasonal company like GNI. A more accurate measure of GNI's annual distributions can be obtained by adding up the last four quarterly distributions. Google Finance does this, and reports correctly that GNI paid out a total of $15 last year. Going forward, $15 is too much to hope for, given GNI's recurring guidance that 2012 "is not expected to reach the historical record earnings achieved in 2011." Since GNI distributes nearly all its earnings, it is a safe bet that 2012 distributions will total less than $15.
Of course, even an accurate yield calculation can be misleading if investors think that GNI's payments will continue into the indefinite future. In fact, GNI has just 3 years and 1 month left before its final liquidation payment, so any yield under 30% means the company is overvalued. Whether the yield is under-reported as 9%, correctly reported as a little under 15%, or even over-reported as 22.8%, the message to current or prospective shareholders is the same: Sell.
Disclosure: I am short GNI.