1st Pick, New Beginning

Hi all,

This is a blog where I post my analysis and recommendation for my own reflection purpose. Hee, means for people out there, it's just for reference.

So let's start:-

Warner Chilcott (WCRX)
Current Price : $29.43 (as at 23 Aug 2010 Market Close)

This is a pharma company which has acquired P&G's prescription drug biz in 2H09.

Interestingly, they announced on 20 Aug 2010 (after Market Close) that they finish the financing portion of their special dividend payment.
(http://www.businessweek.com/ap/financialnews/D9HNGL100.htm)

My goodness, their special dividend is $8.50 to be paid on 8 Sept 2010 for shareholders whom hold the stock from 30 Aug 2010 till 8 Sept 2010 (Becuz of Due Bill Period, otherwise normally no need to hold for so long 1)

Not only is the special dividend super attractive (28.9%, assuming the price don't tank after the dividend payment, which is quite unrealistic, haha), their PE oso...
It is trading at a forward PE of 8.8x. (Based on company's guidance of $3.25-$3.35)
The P&G acquisition turns out quite well and is continuing to help the company.

So what's the trade here?

2 things:-

1) Assuming the stock stay at this level ($29.43) till 8 Sept 2010, and drop $8.50 on 9th Sept to $20.93. K, you earn nothing really from the dividend, but you are left with a stock of 6.25x forward PE.

The 12mths moving average ranges from $23-$25. Before the news of special dividend payment is out in late July, the stock trades at around $22.06-$25.12 in the month of June 2010.

If the stock is to fall back to the low of $22.06, you would have earned a net $1.13 ($8.50+$22.06-$29.43) worth of dividend only, the yield being 3.84% ($1.13/$29.43) for a holding period for about 14 trading days.

Frankly, it's not a bad yield. If the stock don't fall as much, you gain more.

2) With such a big cash payment in 15 days time, it can be attractive to anyone to buy the stock nearer to the date (30 Aug 2010). So Run-up is expected over the course of these few days.

Trade Summary: Buy in anticipation of run-up for a short term trade, to sell on 26/27 August to capitalise the run-up. If run-up doesn't happen, you can fall back on a stock trading at a forward PE of 6.25x or even lower.

You Decide.