For years, special dividend payouts were confined to a small number of companies with plenty of cash on their balance sheet and a strong cash flow. This year, thanks to the fiscal cliff, things are different.
The issue is simple -- the looming prospect that dividends might be taxed at a higher rates next year, should the Bush 2001 tax cut be allowed to expired.
That’s why companies that do not usually pay special dividends -- like Costco Limited Brands, and Regal Entertainment -- have announced one recently.
Sample of Companies that Have Announced A Special Dividend
Company | Special Dividend | % Price Gain in November |
Costco | $7 | 5 |
Sirius | C$0.082 | -3 |
Limited Brands | $1 | 10 |
National Beverage | $2.55 | 18 |
Regal Entertainment | $1 | 4 |
Overall, more than 60 companies have announced special dividend payouts so far, according to CNBC, fueling a “special dividend” rally on Wall Street.
National Beverage’s shares, for instance, have rallied 18 percent in November, Costco 5 percent, and Regal Entertainment 4 percent, while the S&P500 have remained flat.
The dividend rally has investors guessing who will be next to announce a special dividend, with most attention turned to high-tech companies, for two reasons.
First, the fiscal cliff is a good excuse for these companies to return some money to stockholders without upsetting markets—dividend payouts usually being seen as a negative sign by markets, who prefer these companies to plow their cash into R&D.
Second, some high-tech companies like Apple, Cisco, Oracle, and Microsoft have plenty of cash in their balance sheet, low or no debt, a strong cash flow, and good profit growth. Apple, for instance, has $29 billion in cash and no debt—some analysts are speculating that Apple will pay $30 per share.
Company | Apple | Oracle | Microsoft | |
Total Cash | $29.13B | $44.62B | $31.61B | $66.07 |
Debt Ratio | 0 | 11.61 | 33.77 | 17.98 |
Operating Cash Flow | $50.86B | $15.87B | 13.99B | $31.62B |
Profit Margins | 26.67 | 22.20% | 27.55% | 21.71% |
Source: Yahoo.Finance
A few words of caution: Investors should be careful about running out and racing to buy stocks on the prospect of collecting a special dividend. In some cases, markets may have already discounted this prospect. In other cases, a special dividend may, indeed, divert funds from R&D and other investment activities threatening future company growth.
Hype isn’t a substitute for due diligence.
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Disclosure: Long on AAPL and MSFT