Today we’re going to switch it up a bit.
Hearing some rumblings among retail investors about their PBR 0.00%↑ strategy, we want to shed some light on what they’re thinking, why it may or may not work, and our version of the best strategy to execute in the next few days.
“Wow - Petrobras is paying out 50% dividends!
When’s the ex-dividend date? April 28?
I’m going to buy the stock April 27, then sell right on the 28th to collect a free dividend!”
If the above sounds appealing to you, you’re going to want to keep reading.
The Dividend Capture Trade
Strategy 1: Buy a stock ahead of ex-div date, then sell on the date in hopes of "pocketing the dividend"
If you weren't already aware - unfortunately it doesn't work that way.
Instead of telling you the boring textbook reason behind this, lets look at $PBR historic price action around these ex-dividend dates since we can derive other lucrative strategies from these backtests.
The Orange lines above = ex-dividend dates - the date you need to *already* be holding the stock on to receive the dividend
You can see the stock declines every time on the ex-dividend date
Buy before ex-div, sell on ex-div, capture dividends
This is NOT a lucrative strategy!
Efficient markets tell us that the return on this Strategy should be 0%.
In reality? Well, it comes close enough.
Doing the Dividend Capture trade on $PBR the past 8 dividend events would’ve yielded - on average: a whopping -0.3%!
This trade is clearly unlikely to yield outsized returns.
Do NOT buy on the day before Ex-Dividend expecting to walk away with your initial investment plus a dividend on the following day.
You will return 0% (realistically even less due to taxes)
BUT
Just because YOU now know the Dividend Capture Trade doesn’t work doesn’t mean it’ll prevent others from executing it.
Here’s the real alpha, and the trade we will be participating in:
Front-running traders thinking they will profit on the Dividend Capture Trade
Strategy 2:
Buy the open on the Ex-Dividend date (in this next case, November 21, 2022)
Sell at the close on the day *prior* to the next Ex-Div date (April 27)
Lets see how this strategy has performed historically by running a backtest
Average returns if you did ran Strategy 2 the past 8 times: 14.3%
Hit Rate: 6/8
Implied Price Target on 04/27/23: $11.61
Nice returns. BUT.
Most of these positive returns were a result of other unrelated dividend events, such as:
earnings reports
political developments
crude price movements
etc…
TLDR for Strategy 2:
Lucrative, BUT 1) our buy-date of November 22, 2022 has already passed and 2) the price increases were not solely attributable to traders front-running the Dividend. They wouldn’t place a trade 100+ days in advance to front run a massive dividend payout.
That leads us to Strategy 3, where we strip out as much of these outside events as possible to capture the price movements solely attributable to front-running less-sophisticated traders thinking the Dividend Capture Strategy is lucrative (and boy, do they exist)
Strategy 3:
Buy 14 days before the Ex-Div date (in this case April 14, 2023)
Sell at the close of the day *prior* to the next Ex-Div date (April 27, 2023)
Lets run another backtest here:
Identical to Strategy 2 – except we’ll buy 14 days before the Ex-Div date instead of 100+ days
Average returns if you did this the past 8 times: 7.0%
Hit rate: 7/8
Implied Price Target on 04/27/23 based on backtests: $11.44 (7% above the 04/14 open price)
This Strategy largely strips out event-driven price action, allowing us to capture the stock price movement attributable to traders buying the stock in anticipation of the dividend.
Buying 14 days before the next ex-div date means buying on 04/14 and selling on 04/27, the day *before* the ex-div date (i.e: the day *before* you will be eligible for the dividend)
Again: You will not capture the dividend in this case. Instead, you’ll capture the potential run-up to the dividend date in anticipation that traders will buy up the stock ahead of April 28, the ex-dividend date
Based on average historic price action, this should return 7% above wherever the price opens on April 14 (we assume $10.69/share, so price will end at around $11.44/share)
Risks to Strategy 3
The strategy is of course NOT fool-proof. It’s a thesis backed by both anecdotal evidence and a 7/8 hit rate if we ran this strategy in the past.
As you’ve heard, past performance is not an indicator of future results
Heightened geopolitical risk has the greatest potential to invalidating our thesis.
The government could request a proposal to change PBR 0.00%↑ fuel pricing policies which would lead to lower margins (at best) and lead to a sell-off in the stock.
https://brazilian.report/liveblog/2023/04/05/petrobras-shares-pricing-policy/
We could expect longer-term bagholders to dump the stock after they’ve collected one, MAYBE two, more dividends because of this elevated risk - this is why the majority of our PBR 0.00%↑ holdings will be sold PRIOR to the ex-dividend date on 04/28/23
Though we will keep some long-term exposure based on our fundamental outlook for the company and relative inexpensiveness.
As always - DYOR and size up your trades proportionate to *personal* conviction.
Don’t FOMO into this - an abundance of opportunities will always pop up in the future. We will share the opportunities we have high conviction in, but keep it exclusive to paid subs who motivate us to sharing these strategies with you!