How RIM can squeeze the shorts

With 38 million shares short as of the end of November (hat tip NBF research analyst Kris Thompson), and Research In Motion (RIM:TSX) potentially in play against its wishes, what’s a CEO to do?

According to this morning’s Wall Street Journal, RIM’s “just say no defence” is based upon some unnamed sources close to RIM Co-CEO Jim Balsillie who claim that Mr. Balsillie doesn’t want to consider entertaining any takeover discussions until the new BB10 handsets are out late next year:

So far, no bids have emerged, and Mr. Balsillie has indicated he wants to wait until the launch of RIM’s new BlackBerry handset next year before deciding whether to engage seriously with potential buyers, people familiar with the matter said. It is far from certain that either Nokia or Microsoft would want to do a deal, given the complexities involved.

Telling investors to wait a year isn’t going to work (as I said last week on BNN TV, they have 120 days before the Carl Icahn’s of the world buy 5 or 9% and shake the tree, just as happened at CP); if we are about to “intercept the future”, as Mr. Balsillie promised two conference calls ago, that future looks pretty scary. But if our RIM executive team and Board of Directors are really that confident about what’s in the pipeline, there’s a simple way to put a floor on the company’s shares.

Declare a dividend policy. Tomorrow.

This isn’t the first time I’ve made the point (see prior post “Time for a dividend policy at RIM” Mar 19-08), but perhaps they’ll start to recognize the benefits of the concept. Instead of taking this advice when it was offered, RIM’s Board and management team decided to buy back US$775 million of stock at an average price of US$63 — what now appears to have been a crazy-high price (see prior post “RIM chooses share buyback over an 8.5% dividend” Jan 13-10); the last high profile share buyback in the US$60s I can recall was when the Lehman team bought back US$1.6B of stock in 2007, pre financial crisis.

With US$1.5 billion in cash at RIM, and some analysts forecasting EBITDA of US$3.1 billion and US$3.58/share in EPS for fiscal 2013 (the statistical consensus is actually US$4.65), there should be plenty of free cash flow around to finance a 3 or 4% payout policy to start things off; with 524 million shares outstanding and a C$14 stock price, a 4% divi would cost just $293 million a year; that represents barely 10% of forecast EBITDA.

For the bearish equity research analysts, such as NBF’s Mr. Thompson, who forecasts EPS of US$1.37 and negative free cash flow of almost US$400 million in 2013, this move would be a shocker. Companies that are teetering on the brink, which is all I hear about RIM on CNBC each day, don’t start paying a dividend.

And for the RIM Board of Directors, who have been publicly AWOL throughout our Annus Horribilis, a dividend policy would speak to one core issue: that they actually believe the management team when they say the company’s prospects are bright and that RIM will have plenty of free cash flow next year.

Unless, of course, someone’s got a better idea; and soon.

MRM
(disclosure – I own RIM)