Permuto Capital Management Team
In a notable advancement within the blockchain space, Permuto Capital is set to introduce a groundbreaking product aimed at equity investors by addressing a tangible financial challenge. The company plans to separate the dividend and capital growth aspects of common stock, suggesting that by targeting distinct groups of investors, the combined value of these two components could exceed that of the original stock itself. To initiate this innovative offering, Permuto has submitted a registration statement to the SEC and anticipates launching its first equity product featuring Microsoft (MSFT) once approval is granted.
Separation of Economic Components
The concept of segregating the economic aspects of financial instruments is not entirely novel. In the 1980s, the government authorized the practice of coupon stripping for U.S. Treasury securities, where interest and principal components were divided into separate securities known as “STRIPS” (Separate Trading of Registered Interest and Principal of Securities). This division attracted different investor demographics, thereby enhancing the efficiency of the market overall.
Dividends and Capital Appreciation
Drawing parallels to the stripping of Treasury securities, Permuto’s new product divides a Microsoft common share into two distinct entities: a “dividend certificate” and an “appreciation certificate.” Holders of the dividend certificate will receive the dividends issued by Microsoft, while the appreciation certificate provides entitlement to the remaining benefits. Permuto’s unique approach leverages blockchain technology along with single stock voting trusts, which helps streamline compliance and reduce costs, making this product feasible where past attempts have failed due to complexity and high expenses. Investors can deposit their Microsoft shares with a designated custodian and, in return, receive one of each certificate. Once issued, these certificates can trade independently, allowing investors to sell either certificate or purchase them without needing to own the underlying shares. Investors who possess both types of certificates can return them to the trust in exchange for a common share.
Chia Blockchain
Alternatively, investors have the option to hold their certificates as Chia Asset Tokens (CATs) on the Chia blockchain. One significant benefit of CATs is their ability to be traded on decentralized platforms, available 24/7 without interruptions typically found on traditional exchanges. The blockchain technology not only reduces trading fees compared to conventional stock exchanges but also streamlines the distribution process for dividend payments. Permuto charges for processing these payments, retaining a portion for its services. When certificates are held at the DTC, investors receive 80% of the dividends, whereas those holding CATs benefit from a higher return of 90% due to lower costs associated with the Chia blockchain, suggesting that dividend certificates could command higher prices in decentralized markets.
Sample Valuation Calculation
To illustrate potential valuation, let’s consider a simplified example. With a Microsoft share priced at $429 and an annual dividend of $3.32—which is expected to grow by 5% annually, returning 90% to the investor—the total dividend received by the holder of the dividend certificate over thirty years would amount to $198.50. However, due to the time value of money, this future sum is not equivalent to its present value. Assuming an annual depreciation rate of 8%, the present value of the dividend certificate would be approximately $45.46, yielding an annual return of 6.6%. Consequently, the appreciation certificate’s estimated value would be $429 minus $45.46, equaling $383.23. This straightforward calculation highlights how investors can assess the two components of common shares, allowing them to allocate their investment capital according to personal preferences. Investors can choose between regular dividend income or capital appreciation, thereby tailoring their portfolios to meet specific goals. As noted by Trent Martensen, Co-CEO of Permuto Capital, “The ability to choose and manipulate risk exposure assuming a given return requirement is an objective for all investors, and by partitioning common shares into dividends and capital appreciation we are providing investors tools to fine-tune their portfolios.” Discussions around financial engineering and risk structuring in the late 1980s often touched on the value of dividends related to common stocks, and with the advent of modern tools, Permuto certificates may finally provide solutions to these long-standing considerations.
