Financial services company Thorn Group Ltd (ASX: TGA) announced on Monday it would pay a special 7.5 cents per share dividend on 3 November. At Tuesday's closing share price of 25 cents, that represents a dividend yield of 30%. The Thorn share price goes ex-dividend on Friday. This means investors buying the share at or near 25 cents before Friday will get a payment of up to 30% in less than 3 weeks.
On publication of the company's quarterly report, it stated that Thorn held $54.1 million of free cash. As this is excess to requirements, the directors have decided to return $24.2 million to shareholders, thus producing the high dividend yield payment.
Investors seeking to capitalise on this yield would need to act fast. The Thorn share price already spiked by 19.05% yesterday. A payment of this magnitude is going to attract attention.
Performance of Thorn Group
Thorn Group is a company with two main lines of business. First, it is the owner of Radio Rentals, a consumer leasing company. Second, it owns Thorn Business Finance, which provides a range of tax effective credit options for small to medium enterprises (SMEs).
The company has had a difficult couple of years. However, FY20 has been a turning point for Thorn Group, sparked by the pandemic crisis. By the end of the year, it had changed several substantial shareholders, appointed a new board of directors, installed a new CEO, changed several members of senior management, settled a class action, and completed a capital raising.
Nonetheless, this is the third time this year that Thorn Group has seen its share price rally. Yesterday, of course, it rose in anticipation of the large dividend yield. The first time it rose by 60% on news it would permanently close all Radio Rentals stores, changing it to a digital only business. The second time it rallied by 30% on the release of its June quarter report, in which it announced a boost to free cash of $54.1 million.
Strategies for the dividend yield
Investors interested in securing this payment would need to buy quickly to ensure a dividend yield as close as possible to 30%. They would then need to hold onto the shares past the ex-dividend date. Unfortunately, I am pretty confident the Thorn Group share price will collapse on Friday. This is because share prices often fall by the approximate value of a dividend payment after the ex-dividend date has passed. So, investors buying shares only for the dividend, and not trading out of them on Thursday afternoon to lock in share price gains, would need to be prepared to hold onto them until they rise again.
Nonetheless, I believe this company is truly at the beginning of a disciplined turnaround. We're entering a period where SME finance is likely going to be very important to the country, so I believe the Thorn Group share price will continue to rise gradually over time.
