TAXI has lost 64% since the all time Pump-and-Dump Peak on November 29, 2013, 57% after adjusting for dividends.
On February 5, 2016, TAXI hit an intraday low of $6.36 and closed at $6.47
On January 20, 2016, TAXI hit a 52-week low of $5.90 and closed at $6.11.
On May 18, 2015, TAXI hit a high of $11.04 and closed at $10.92, which was $10.30 after adjusting for all dividends paid as of the market close on February 5, 2016.
On May 11, 2015, TAXI hit a 52-week high of $11.05 and closed at $11.01, which was $10.15 after adjusting for all dividends paid as of the market close on February 5, 2016.
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How has TAXI management scammed TAXI investors?
Management’s abuse of stockholders since the beginning of 2011 was explained in the first article we published in Seeking Alpha on December 19, 2014, titled:
Capital Allocation Policy Difficult to Comprehend
Capital allocation has been inexplicable in recent years for Medallion Financial.
In the last three years, the Company’s cash operating earnings have not been sufficient to cover the dividends paid.
Of the $54 million of dividends paid since the end of 2011, 40% represented return of capital (see discussion below) or payout in excess of earnings in that time.
During this same period the Company was also buying back shares and issued $85 million in two secondary offerings, an entirely inefficient, circular shuffling of investor capital.
The aggregate cost of the two secondary offerings was $5.3 million.
The dividend should be reduced to a sustainable level based on cash earnings, in our opinion, and raised in line with earnings growth going forward.
We do not believe the headline 8.5%-9% dividend yield or the share repurchases are understood by many investors, in this sense, and with fundamentals breaking down in its core business, we do not see how the Company can possibly grow its cash earnings to levels actually covering these distributions.
[As of TAXI’s close at $6.47 on February 5, 2016, the headline dividend yield is levitating at 14.86%!!!!!!!!]
In short, the current dividend and share repurchases are not sustainable, in our opinion.
Issuing more equity to cover cash shortfalls will be a lot harder as the deterioration of medallion markets continues to play out…
…Two Secondary Offerings Since 2012
Medallion Financial executed a 2.9 million shares secondary offering in the fourth quarter of 2013 priced at $16.40/share (peak daily close was $17.74/share, at the end of November 2013) as well as a 3.5 million shares secondary in May 2012 at $10.72.
The Company’s press releases for the respective closings suggest the cost to execute these offerings, commissions, underwriting discounts and offering expenses, was $2.9 million and $2.4 million, respectively.
Dividend is not Being Covered by Cash Earnings – 40% of Payout Since 2012 a Return of Capital
As mentioned, Medallion Financial is bound to pay out 90% of its pretax income as a regulated investment company and remain exempt from US federal income tax on any gains, investment company taxable income or net operating income.
The Company is paying a “dividend” of $0.96/share, yielding between 8.5% and 9% on the recent share price trading range ($10 – $10.75/share) that warrants greater scrutiny by investors.
We do not believe the difference between return of capital and return on capital is well understood based on market commentary on Medallion Financial’s dividend yield.
The latter [return ON capital] is sustainable and part of one’s total return on investment, the former [return OF capital] is not, making the headline “dividend yield” of Medallion Financial misleading in this sense.
Moreover, the Company has doubled down on this financially unsustainable trend through its share repurchase program.
High dividends and share repurchases are justifiably welcome by investors generally as bullish signs of Board and management confidence in their business and share price.
But when this spending has to be financed through secondary offerings, $50 million only twelve months ago and another $35 million in May 2012, borrowing and asset sales, they amount to slow liquidation of the Company’s assets, and the signal raises serious questions about prudent allocation of scarce capital by the Board of Directors and senior management.
In 2014 (through September), 2013 and 2012, respectively, 23%, 46% and 53% of the dividend was actually a return of capital – liquidating or borrowing against assets, some of which were recently gathered through the second secondary offering since 2012, and distributing the proceeds to shareholders, thereby reducing each investor’s cost basis in the stock.
A cumulative 40% of the $54 million in total dividends paid out since and including 2012 was return of capital.
These amounts are clearly labeled “Return of Capital” on the “Consolidated Statements of Changes in Net Assets.”
That means of the dividends paid out since 2012, $22 million has been nothing more than drawing down assets and sending the proceeds to investors, from whom $85 million was sought and received during the same period.
The Company’s cash earnings have not covered the dividend in any of the last four years.
A glance at the book value of Medallion Financial since 2011, up over 60%, gives a pretty favorable first impression of value creation, but when one understands that almost 120% of that increase was directly attributable to secondary offerings ($85 million) and unrealized, non-cash appreciation in passive investments ($37 million), the unsustainable nature of payout policy becomes obvious (see Exhibit 7).
Medallion Financial’s core operation is earning a spread between the money it borrows and the money it lends.
Passive, non-cash, unrealized gains are not core, operating gains even though they may one day be realized.
A prudent payout policy would be to undertake special dividends if and when such gains are realized, rather than paying out cash not generated by operations for four straight years.
But for selling more shares to the public, borrowing or asset sales, Medallion Financial would not have been able to pay this dividend or repurchase shares dating back at least to 2011.
Five Years Of Abuse of TAXI Stockholders
On December 31, 2010 TAXI closed at $8.20.
After adjusting for five years of dividends paid, the adjusted price on December 31, 2010 was $5.58.
On January 20, 2016, TAXI hit $5.90, only 6% higher over five years.
During those five years, the S&P 500 rose 49% after adjusting for dividends.
Most egregiously, Andrew and Alvin Murstein siphoned off a total of $19 million in cash compensation from TAXI stockholders from 2011 through 2014.
Within a month, TAXI stockholders will know how much the Mursteins raked in during calendar 2015.
While TAXI’s total return after adjusting for dividends dropped 22% in 2015.
How do YOU spell A-B-U-S-E?
Sell all of your TAXI now.