Should you close both eyes and buy ?

When a company declares big dividend, should you close both eyes and buy? One of the examples is Opcom.

They declared 22.5 sen special dividend recently. And stock price shot to the moon.

However, if you look at the lower chart, the indicator points to distribution immediately. Shit, someone has been accumulating prior to the announcement.

Those rush in and buy are really stupid. Why I said that? When the stock go ex, it will come back to 80 sen. So what is your gain? ZERO, absolutely ZERO. Worst still, after paying 1.4% to broker and I hope it is income tax free, you might even suffer a minor loss.

I think the chance price of this stock to higher is slim. Wrong you said, the company has 72 million cash sitting nicely on its balance sheet. After minus 29 million of this special dividend, it still has about 42 million cash. That will translate to cash per share of 0.33. May be they will pay another round of special dividend?

Well, we will have to take a look how robust is their business. Opcom is in manufacturing of fiber optic. Their business depends a lot on one single customer that is Telekom Malaysia. A few years ago they lost some parts of their business to Leader cable. O Yea, being Mahathir's son was not been able to help. The got to compete on a level field. Their margins suffer when they have to compete. But it has bounced back strongly in FY 2011.

The question is why their revenue doubled in 2010? They said their shipments had doubled. Why it is so? Digging into their annual reports, they said Fiber to Home program has gone up from 350,000 homes to 800,000 homes from 2009 to 2010 and they expect to add another 500,000 homes by 2012. The growth potential seems to be fantastic but end markets growth does not equal to Opcom's top line growth, why ? We got to differentiate installed capacity and utilization. Telekom could have invested way ahead while the utilization is low. Unless, I can get a good data and understand this factor, I will not be able to forecast what will be their growth potential for the next 3 years. It may grow or it may not. If one were to commit fund to it without proper understanding on this key success factor, it's merely gambling.