On Thursday, Limited Brands (NYSE:LTD), the parent of such high-profile retail properties as Victoria’s Secret and Bath & Body Works, announced a vibrant 7% increase in same-store sales for November. The real news that day, however, was the company’s announcement that it would pay shareholders a “special” $2 per share dividend. But just what is a special dividend, and what does it mean for the markets?
Simply defined, special dividends are one-time payments that a company makes without any commitment to continue paying dividends on a regular basis. They differ from “regular” dividends, which are those paid usually on a quarterly basis.
So, why would a company pay a special dividend?
The chief reason is that they want to retain investors and make shareholders happy. A special dividend is a great way to create goodwill among current and potential shareholders. It’s also a way for a company to generate positive headlines. For some firms, the goodwill and good PR can be more valuable than just holding on to pathetically low-paying cash deposits, and apparently Limited fits this bill.
Another high-profile company that recently announced a special dividend is casino operator Wynn Resorts (NASDAQ:WYNN). CEO Steve Wynn certainly knows how to generate goodwill and good PR, and the announcement in early November that WYNN shareholders would receive a $5 per share special dividend once again proved his acumen at the helm of the company.
Other high-profile names announcing special dividends this year include Internet services firm VeriSign (NASDAQ:VRSN), transportation and logistics firm Werner Enterprises (NASDAQ:WERN) and electronics direct marketer PC Connection (NASDAQ:PCCC).
Sometimes, a company will offer a special dividend in the form of ownership in a spinoff company. Such was the case with oil giant Sunoco (NYSE:SUN), which on Thursday declared a special stock dividend to its shareholders for its stake in coke producer SunCoke Energy (NYSE:SXC). In Sunoco’s case, the special dividend was part of a divestiture plan, which is another reason why companies sometimes go the special route.
The rub with special dividends is that you never know when a company is going to decide to pay them out. That makes buying a stock in anticipation of a special dividend nearly impossible. However, if you do own a stock on the basis of sound fundamentals and sound technicals, and that company decides to pay a special dividend, then that’s likely going to keep you smiling — and that’s the chief reason why special dividends are a great tool for generating goodwill, and good PR.
Disclosure: At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.