Many companies have captured headlines recently with
announcements ofspecial dividend payments. In November alone, 173
companies announced special dividends, up 137% from the previous
eight months combined.Shares of these companies have jumped as much
as 6%, as management and large shareholders try to avoid
highertaxes next year by paying out excesscash before the end of
Although the share-price increase following these announcements
may be lower than expected, there's still a way for investors to
benefit from this upswing in prices -- by anticipating these
special dividends. And while a long-term position individend payers
should only come after more in-depth analysis, getting in a
position before the company announces a special dividend is great
for a quickprofit .
[Note that the payment of a special dividend does notmean the
companywill suspend its current dividend policy. It simply means
theboard of directors thinks returning the money to shareholders is
a better use of cash.]
After all, politicians are still duking it out, and we have yet
to see any resolution to the so-called "Fiscal Cliff."
Politicians have drawn a line in the sand and it looks like,
at least for now, taxes on dividends for those in the higher income
brackets will be going up next year.
As it stands, the sunset on the Bush-era tax cuts have taxes
increasing from 15% to as high as 43.4% and 39.6% at the highesttax
bracket , plus an additional 3.8% in new taxes from the Affordable
Care Act (otherwise known asObamacare ). This means taxes on
dividends could almost triple.
Theinvisible hand at work
The Wealth of Nations, the seminal work byAdam Smith in the 18th
century described an invisible hand ofcapitalism that moved
theeconomy by each individual seeking their own personal gain. This
would make for the most efficient allocation of capital and the
overall economy would grow as a consequence.
Las Vegas Sands (
, along with majority owner Sheldon Adelson, has been the best
example of this so far. Adelson owns 45.8% of the iconic desert
casino company and pays about $47.6 million in annual taxes on the
current quarterly dividend of 25 cents a share. With the new tax
hikes, Adelson could owe about $137.8 million in taxes next year.
Paying almost $100 million in additional taxes is a downer, even
for someone with anet worth of $21.5 billion. Paying out the
special dividend of $2.75 a share this year, Adelson saves up to
$248 million. As noted before, the available $2.75 per share would
have eventually been paid out to shareholders, whether through
special dividends or an increase in the regular dividend payment
next year, which would be taxed at the higher rates.
Adelson is not alone. Members of the Walton family, collective
owners of 51% of the shares in
stand to save a combined $166 million just by shifting one dividend
payment of 39 cents a share to December from January of next
Before you jump on the special dividend
Here are three key points investors should consider to front-run
the news on special dividend announcements:
• Individuals with high ownership in a stock -- such as Adelson
and the Walton family -- are likely to pressure the company to pay
a special dividend to protect their tax bill next year.
• Companies with a low amount of debt and high cash flows
can afford to return money to shareholders without sacrificing
capital expenditures needed for growth.
• Companies that already pay a dividend are more likely to
bring payments forward or announce a special dividend than other
companies that don't.
With these three fundamentals in mind, here are three strong
companies that could be announcing special dividends before the end
of the year. They're not only appealing for their dividends, but
they all have pristine balance sheets and good prospects for growth
1. A housing rebound beneficiary
Williams Sonoma (
, a specialty retailer of home products,
has more than $352 million in cash and only $5.4 million
inlong-term debt , leaving $3.52 in cash per share. With only a
37%payout ratio , the company pays a dividend of 88 cents per
share, whichyields about 2%. With the rebound in housing, the
company could see strong cash flows during the next few years, so
it can afford to payout some cash now.
2. Support from Obamacare
One of the world's top medical equipment makers,
is also a candidate for a special dividend. The stock currently
yields about 1.5% but only pays 23% ofearnings , leaving plenty of
room for dividend growth. The company has more than $3.8 billion of
cash on itsbalance sheet and only $1.8 billion in debt.
The shares have been under pressure this year ahead of
Obamacare's 2.3%excise tax on medical equipment. While a complete
rollback of the tax is not likely to take effect, any negotiated
easing could boost the shares. Even if this excise tax remains,
then demographics and increased insurance coverage resulting from
Obamacare will still provide significant support in the years to
3. An online retailer with billions in cash
Founder Jeff Bezos still owns 19.2% of theoutstanding shares in
Amazon (Nasdaq : AMZN)
. The company is a cash monster, with $3.9 billion in operatingcash
flow last year, and more than $5.2 billion in cash and
short-terminvestments on the balance sheet. While the cash
stockpile only amounts to $11.48 per share, the company has no
long-term debt. Revenue has grown by an annualized 39% during the
past two fiscal years, so the Internet giant should have no trouble
giving shareholders a holiday treat.
Risks to Consider:
Share prices may fall after the announcement bump and directly
following the special dividend. In reality, special dividends only
transfer wealth to shareholders rather than creating a higherasset
value. Investors may want to reassess their holdings after the jump
in shares as a result of a special dividend announcement.
Action to Take -->
Look for companies with high individual ownership, low debt and
good cash flow for clues into the next special dividend payout. The
three companies I mentioned here could potentially announce a
special dividend payment soon. Even if they don't, their healthy
balance sheet and great business prospects are still great reasons
for investors to research them further.