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Earlier this week, the board of directors of CBOE Holdings Inc. (CBOE - Analyst Report) announced a special cash dividend of 75 cents per share payable on Dec 28, 2012 to shareholders of record as of Dec 21, 2012. This implies a dividend yield of 2.5%, based on the company’s closing share price of $30.00 as of Dec 13, 2012.

CBOE expects a cash outlay of about $66.6 million for the dividend payment, considering the number of shares outstanding at present. The company will use its cash-in-hand to pay the dividend.

This will substantially reduce CBOE’s cash and cash equivalents, which stood at $160.3 million as of Sep 30, 2012. However, the company generated operating cash flow of $140.87 million during the first nine months of 2012, which is sufficient to cover the expenditure for the special dividend.

The strong cash flows generated by CBOE along with the absence of debt have resulted in a sturdy balance sheet and abundant free cash. Consequently, the company strives to regularly return the excess capital to shareholders through dividends and share repurchases, apart from investing in business.

In addition to this special dividend, CBOE declared a regular quarterly dividend on Oct 30, 2012. This cash dividend of 15 cents per share (for the fourth quarter of 2012) will be paid on Dec 21, 2012 to shareholders of record as of Nov 30, 2012.

Apart from dividend payments, CBOE used its excess capital for share buybacks. The company repurchased 1.87 million shares at an average price of $26.58 per share up to Nov 1 this year. This involved a cash outlay of $49.7 million. As of Sep 30, 2012, outstanding balance in the company’s share repurchase program stood at $103.3 million.

Other exchanges, such as Nasdaq OMX Group Inc. (NDAQ - Analyst Report) and NYSE Euronext Inc. also regularly deploy capital via share repurchases and dividend payments. Currently, CBOE carries a Zacks #3 Rank (Hold). We maintain a long-term ‘Neutral’ recommendation on the stock.

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