18% Dividend Yield but...

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Imagine a company with return on assets of 77%, a low PE of 4.99, no debt, and an amazing dividend yield.  Then add in the fact that we are living in a yield hungry market.  People would do anything for a 15% + yield in a relatively safe investment.  This is real but it has a major flaw.  This company is Great Northern Iron Ore Properties (NYSE: GNI).  It is the perfect business.  Even more perfect than Jack Donaghy's perfect business in 30 Rock, the adult entertainment industry.  GNI controls land in Minnesota that is rich in iron ore.  Mining companies build infrastructure, mine the iron ore, and ship it to the customers.  GNI does nothing but collect royalty checks when the ore is shipped to the customer.  Since GNI is a trust created in 1906, it is not obligated to pay federal or state taxes...yet another win.  If you wanted, you could even hedge out metal prices.

Yes, this is way too good to be true...the trust will cease to exist on April 6, 2015.  The worst part about the trust terminating is that the land that GNI controls will be given to ConocoPhillips (NYSE: COP).  That is right, it will be given, not sold to Conoco.  The land was leased to GNI and will be leased to ConocoPhillips.  The lease for GNI ends 20 years after the last remaining survivor of the original trust agreement dies.  That date is in about 2.5 years.  So then the investor needs to figure out how much they will receive in dividends before the land is transferred to ConocoPhillips.  

There are 10 more dividends until April 2015 plus a final distribution in April.  In 2011, the 4 dividends totaled $15.  In 2012, the 3 dividends so far have totaled $8.75 but the December dividend has historically been larger than the others.  Management has stated that dividends in 2012 will be less than 2011 so the December 2012 dividend must be until $6.25.  Let's assume it is $5.75 which is the same price as the December dividend in 2011.  Then, if we estimate that the 9 other dividends will be similar to the dividends in 2012, the total amount in dividends left is $37.00.  The final distribution will be net assets of the trust plus Principal charges.  Management estimates this total amount to be $12,889,000 or $8.59 per share.  So the grand total, if there are not substantial changes in the next 2.5 years, is $45.59 per share. 

The stock is trading at around $78.85 so that is a 73% premium to its likely future distributions.  How can this happen?  It is hardly a nano-cap that nobody looks at.  It has a market value over $113 million and big firms like BlackRock (NYSE: BLK) own millions of dollars worth.  Blackrock's investment is only for about $3 million so it could be part of a income producing fund where the individual assets are chosen blindly.  This could be the case for the other institutional investors too.  On the retail side, it is likely that many investors are lured by the big dividend and the investment in metals.  Do not be one of these investors about to lose almost half of their investment in the next few years.


mthiessen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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