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| By Nilus Mattive |
Right around the time my regular Monday column was hitting your inbox, Strategy (MSTR) was making an announcement of its own.
It was about a new plan designed to address some of the concerns I was raising.
Strategy’s stock and its associated preferred shares got a relief rally as the news hit.
But as you’ll see, the proposed moves don’t really solve anything.
What they really do is prove the biggest point Martin and I make in this urgent new video about chasing dividend yields that are too good to be true.
In case you haven’t been following the story, here’s what’s been happening …
Strategy is the original and biggest Bitcoin treasury company. Its business is basically buying and holding the cryptocurrency.
For a while, it was trading at a big premium relative to the value of the crypto in its coffers. So, it could issue more shares and use the proceeds to keep buying more Bitcoin.
Eventually, Strategy’s founder, Michael Saylor, got another bright idea: He decided to start issuing preferred shares to raise even more capital to buy even more Bitcoin.
Preferred shares are basically stocks designed to act more like bonds.
They typically pay big dividends and offer more rights to their holders.
They also tend to be more popular with institutional investors.
Strategy’s Variable Rate “Stretch” Preferred Stock, or STRC, was originally designed to maintain a stable value around $100 and pay an eye-popping annual yield of 9%.
But to maintain that price stability, Strategy had to raise the promised yield to 10% …
Then 11.5% …
And now with this new announcement, 12%.
Those payments have never been guaranteed though, even if millions of investors considered them iron-clad.
The Monday announcement reiterated that reality with the following line …
“STRC dividends remain subject to declaration by the Board of Directors or an authorized committee and are not guaranteed.”
There are other details of the announcement to consider, too …
Strategy also said it’s establishing a fund worth $2.55 billion expressly for supporting its various dividend and interest obligations.
The current annual bill for those is $1.76 billion, giving the company about 17 months of runway.
That can be only viewed as a positive, albeit a relatively temporary one.
The longer-term picture still looks more problematic.
Remember, most dividends are supported by cash flows from actual business activities.
But Strategy’s only real business activity is buying and holding Bitcoin. And it can’t generate any money from that Bitcoin unless it sells it.
For the longest time, the company said it would never do that. Which is precisely why things started going south as soon as it reneged on that promise and sold a mere 32 Bitcoin at the end of last month.
Now, in this new announcement, the company says it has approved the possible sale of up to $1.25 billion in additional Bitcoin to further support dividends and interest obligations.
What we’re left with is the equivalent of the “three shells and a pea” game.
Strategy can make moves with its common shares, its preferred shares and its Bitcoin. The dividends and interest are the pea.
What the company has proposed right now does nothing to solve the longer-term problem.
In fact, if it does follow through and starts selling more Bitcoin, then things could worsen.
It really all hinges on the underlying crypto market.
If investors get concerned about further selling from one of the world’s largest Bitcoin whales and try to get ahead of it, Strategy might not get the prices it wants.
Even if investors decide to start selling alongside it, the company has the same basic problem.
This is probably why STRC only rallied back to the $86 mark after the announcement.
The market knows that it will really take a substantial recovery in Bitcoin itself to truly solve Strategy’s current dilemma.
But the company has been the biggest corporate buyer of Bitcoin. So, it requires some other source of demand to make that happen.
If anything, Strategy’s continual presence in the market has provided an important psychological anchor for other crypto buyers.
I’m not saying I know how this plays out from here.
It could all work out just fine.
But I also think it could end with an even bigger catastrophe at Strategy and possibly even a deeper correction for the entire crypto market.
Either way, it reinforces the biggest point I’ve been making in the middle of this whole DATCO debacle. Which is …
Anytime you see an investment offering a yield 2x or 3x higher than just about anything else in the markets, you can assume there is also a big element of risk lurking underneath the surface …
Risk that can lead to price declines, slashed payments or both.
A lot of regular people thought they had found some infinite money glitch with Strategy’s preferred shares.
Now, even the company itself is explicitly reminding everyone that there are no guarantees at all.
Best wishes,
Nilus Mattive
P.S. Again, if you’re looking to rapidly grow a retirement portfolio using much safer dividend stocks, then I encourage you to watch this how-to video that Martin and I just recorded.
He’s already been using the strategy with $500,000 of his own money and banked five double-digit winners in less than five months with an overall real-world win-rate of 72%.
Click here for a full explanation of how (and why) it works.
1 https://www.quantumonline.com/search.cfm?tickersymbol=STRC&sopt=symbol
2 https://finance.yahoo.com/markets/crypto/articles/strategy-says-may-sell-1-130414153.html
