It is Tuesday and my heart is breaking. Should I purchase 1 or 3 companies today? Or should I purchase both? Well, that is what we are going to do today. Our choice is going to mutate 1 company into 3. Cowabunga (Michelangelo, Teenage Mutant Ninja Turtles). I hope this 3 way doesn’t break my dividend heart.
R.R. Donnelley & Sons (RRD) is breaking up into 3 companies. RR Donnelley communications, book publishing, and Edgar Online. So if we buy 1 company right now, we will soon have 3. They believe that this will unlock a lot of value, meaning the share price will go up. Right now, they have a market cap of $3 billion and their revenue is $11 billion. A lot of companies have a market cap 2 times their revenue, or P/S ratio (Price to Sales [Revenue]) closer to 1. Now their PE ratio is a little on the high side at 22, which is higher than the S&P.
Some simple math to unlock value: If we get a little above a P/S ratio of 0.6, this will double the price of the stock. If their dividend had a more normal yield of 4%, this would represent an increase of 50%. Often, when a company splits, it will form a high growth and a cash cow but a slow grower. If one of their companies is given a high multiple of 40 PE, this could add up to 20% increase in value.
While we are mainly interested in dividends, we do not want the stock price to go down, especially faster than the dividend. Losing money in account is not good, expect maybe when it is an opportunity to buy more. While I cannot find all of the information on the split as I would like, I can assume they are not doing this to lose money. This will help them give a better focus into the 3 areas. If management, marketing, and R&D have split focus, this can cause one area to suffer for another. Even with a smaller team in each company, with all of their focus in one area, they can do a better job. “Never half ass two things, whole ass one thing” (Ron, Parks and Recreation).
Seeing how some simple math can add up to the stock price going up, and more focused companies creating better value, we can see them going up. And if they are better focused and making more money, we can get more dividends in the future.
What we Bought
We bought 25 shares for $423.00 including commissions. Assuming that we can get a 42% stock price increase within a year, that will bring us up to $600.00, or buying 3 companies at $200 apiece. We will start earning $16.64 in dividends a year. There is a chance that 1 of the 3 parts will not pay a dividend. While we only purchase dividend stocks, we may inherit a company that does not pay a dividend. I wonder what our future decision on this will be. If that happens, would you still keep the non-dividend portion? Hopefully, R.R. Donnelley & Sons (RRD) will not break our hearts, just break up.
Disclosure: We own shares in RRD