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Special Dividends = Special Returns

The fiscal cliff is popularizing the practice, but many who use special payouts 'regularly' do so with success

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Is your favorite stock paying a special dividend before the end of the year?

Many are, including Costco (NASDAQ:COST), which announced Wednesday it will dole out a one-time dividend of $7 per share to shareholders of record on Dec. 10.

The neglected cousin to the more familiar regular dividend, special dividends can juice the performance of a stock well beyond the norm. With a little sleuthing, though, investors will find companies paying special dividends as a routine part of their capital allocation.

I’ll illustrate — using specific examples — how you can profit from this relatively rare shareholder reward.

Taxes, Taxes, Taxes

American companies are announcing special dividends at a blistering pace. A total of 103 have announced they will pay a special dividend in the fourth quarter — 72 more than is typical in the final quarter of the year. Movado (NYSE:MOV), Carnival (NYSE:CCL) and Las Vegas Sands (NYSE:LVS) are among some of the most recent companies to announce special payouts.

As I mentioned in the opening, Costco will pay a special dividend that amounts to roughly $3 billion, or 62% of its current cash stash. It’s doing so in large part because the tax on dividends is expected to rise for some of its shareholders in 2013.

For those of you that are unfamiliar with special dividends, this threat has been ongoing for several years now; President Obama and Congress appear ready to extend the Bush-era tax cuts for another year for all individuals making less than $250,000. For most people, this means the tax on dividends will remain 15%. Clearly, Costco and the rest of the Johnny-come-lately special dividend payers seek to appease their wealthiest investors, but that’s a subject for another day.

As a proponent of special dividends, the increased activity is welcome news. However, I seriously doubt most companies will incorporate them into their long-term capital allocation plans — and that’s a shame, because they provide managers with the ultimate flexibility for rewarding shareholders.

Why They’re So Special

In good times, when cash accumulates unexpectedly thanks to better-than-anticipated cash flow, special dividends give firms the opportunity to pay out what isn’t needed to operate the business; in bad times, they’re under no obligation to pay a regular dividend, which many shareholders have come to consider a right rather than a privilege.

Ultimately, I view the regular use of special dividends as producing a more consistent total return than either regular dividends or share repurchases. Two examples to make my case are Buckle (NYSE:BKE) and Schiff Nutrition International (NYSE:SHF).


From the beginning of 2008 to the end of 2012, Buckle will have paid out $3.98 in regular dividends and $13.05 in special dividends — $17.03 in total. During the past decade, BKE has increased its operating income in all 10 years; 2012 should be no different.

CEO Dan Hirschfeld — Buckle’s largest shareholder with 33.8% of the stock — has received approximately $276 million in dividends over the past five years, while his current shareholdings are worth more than $800 million. He has done well for himself, but so have his fellow shareholders. By my calculation, Buckle has achieved an annualized total return of 26.6% since the end of 2007 through Nov. 23, with 11.6 percentage points from dividends (76% of the special variety) and 15 percentage points from capital appreciation.

You couldn’t balance that any better if you tried.

Article printed from InvestorPlace Media,

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