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The Next Special Dividend

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The current rage in the world of investing is the special dividend. It’s a one-time event that is designed to reward shareholders with a larger than normal payout. The reason for this is simple, the tax rate is going to change in 2013, so companies are loading up on dividends now instead of the slow trickle that investors are used to.

The strategy around the special dividend has as much to do with returning cash to shareholders as it does with keeping the stock off a sellers hit list. With changes to the capital gains tax rate coming next year, December is likely to see a barrage of selling in stocks that have had significant year to date increases. The thinking there is that investors will take the gain and pay a lower tax rate in 2012 than they would in 2013. The special dividend is a tool that some companies may use to deter that line of thinking, or even put the EX-D date as close to the end of the year as possible.

Not A New Idea

The special dividend has been around for a long time... The most famous and probably the biggest was the 2004 $3 payout by Microsoft. They had $69 billion in cash on hand for a $32 billion special dividend of $3 per share. They also enacted a buyback to bring the total return of capital to shareholders to $75 billion. Eight years later, the company has $66 billion in cash again.

I pulled a chart to gauge the interest of special dividends, and the peak was reached in November 2004, when the Microsoft dividend was about to trade Ex-D. The indexed chart has November 2012 at a 26 - well below the November 2004 peak.

Notable Special Dividends

Companies of all sizes have utilized the special dividend. Town Sports International (CLUB) recently went EX-D on a $3 per share special dividend, paying out $71.4 million. The company noted that it would borrow $60 million to fund the payout. CLUB has a market capitalization of $232 million, so it is a small cap. From the date of the announcement to the before the stock traded without the dividend, the stock rose 5.3%.

A mid cap name that is also doing a special dividend is Dillard's (DDS). The company declared a one-time cash dividend of $5 per share. The company will pay the dividend to shareholders of record as of December 7, so the ex-D date will be December 4. You will need to but the stock before the close of trading on December 3 to get the dividend. The payout will be approximately $235 million. The company last reported cash on hand of $124 million, so a debt offering of $150 million or more is likely in the works.

At $44 billion in market capitalization, Costco (COST) is a big cap. It too joined the dividend parade with a $7 special dividend that will cost $3 billion. The $7 will be paid on the 18th of December to shareholders of record at December 10. This means the stock will trade EX-D on the 7th, and will open $7 lower than the close on Thursday, December 6th. As a result of the borrowing that is to occur to raise the $3 billion, Fitch downgraded its issuer rating to 'A+' from 'AA-'.

Those are three examples of companies that are the three major sizes of stocks. I know that I used two retails names in there, but I liked the idea of $3, $5, $7 - which used to be my favorite boutique in the mall.

I ran a screen on the Zacks Research Wizard for stocks that had a Zacks Rank of #1 (Strong Buy) or #2 (Buy) and looked for high insider ownership. This provided a lot of results, but more research was required. For instance, #1 Ranked World Wrestling Entertainment (WWE) sounded like a sure winner as the chairman Vince McMahon holds a significant amount of stock, but a quick breeze through a recent 10K showed that the McMahon family has an agreement that gives them a smaller dividend, so a special dividend could be subject to the same stipulations.

That screen provided these candidates:

Syntel (SYNT - Free Report) - with a #1 Ranking, the company has 36% insider ownership of 36%, institutional ownership of 34% and $10 of cash per share. The company already pays a small dividend of $0.24 or 0.4% so a $2 to $4 special dividend from this low bed, cash rich business is a real possibility.

DSW Inc (DSW - Free Report) is benefitting from the hot trend in the footwear category, and they came in with 51% insider ownership. With $7.57 in cash per share, the company could easily afford to increase its $0.72 dividend to something much more significant. DSW is a Zacks Rank #2 (Buy).

When I loosened the requirements to a #3 (Hold) Rank Caesars Entertainment (CZR - Free Report) showed up. Several of its competitors have also done special dividends and CZR has almost $9.50 in cash per share.

Interacting Plays?

Two other names that I wanted to throw out there Interactive Brokers (IBKR) and IAC/InterActiveCorp (IACI). Both are majority controlled by one person, Thomas Peterffy for the brokerage company and Barry Diller for the internet company. Peterffy is just coming off a failed election campaign to get watchers of financial focused TV to vote republican, so adding some cash back in his pocket to pay for those ads makes sense. Diller, on the other hand, may be more interested in find another M&A transaction that going the dividend route, but ultimately it is his decision.

Good Shooting ?

Strum Ruger (RGR) was one of the early names to announce the special dividend. Its primary competitor Smith & Wesson (SWHC) reports earnings on December 6, and it could be the time to announce the special dividend. Since the RGR announcement of a special dividend of $4.50, the stock is up nearly 20%. SWHC has $0.87 of cash per share.

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Brian Bolan is a Stock Strategist for He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio

Brian is also the editor of Follow The Money Trader a trading service that tracks institutional money flows and looks for great stock picks from that data.

Follow Brian Bolan on twitter at @BBolan1

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