Over the course of 2010 and 2011, we at StreetAuthority.com ran
a number of articles focusing on the ever-rising cash balances of
corporate America. Companies took the crisis of 2008 and 2009 to
heart and started to build up huge reserves of cash for the next
rainy day. And in recent quarters, these cash piles have kept on
growing.
I recently took a look at 10 companies sitting on
combined $762 billion in cash
, but it's also possible to find huge cash balances throughout the
S&P 500.
Here's a sobering stat: At the end of 2008, companies in the
S&P 500 had roughly $900 billion in gross cash. This figure now
exceeds $1.3 trillion -- a more than 40% gain in less than four
years. Of course some of that is attributable to a recent heavy
slate ofbond issuance, as companies seize on ultra-low interest
rates. Still, net cash levels are more than 25% higher since the
end of 2008.
Too much cash might seem like a good problem to have -- but it's
not. It drags down key financial measures such as return on equity,
and eventually forces management to take action. In some instances,
a company might make a boldacquisition , which doesn't always pay
off.
Exxon Mobil (NYSE:
XOM
)
for instance, likely regrets the $41 billion it paid for natural
gas giant XTO Energy in 2009 soon before prices collapsed.
"...the lowest tax environment for dividends for the next
10 or 15 years."
Of course, many companies will look to part with that rising cash
through ever-rising dividends. Yet we're just three months from a
possible major change in tax policy that could blunt the appeal of
high dividends. As of Jan. 1, 2013, thedividend tax rate is
scheduled to rise from the current 15% to income-based tax
brackets, which in some instances may exceed 40% (when newMedicare
surcharges are included).
That's why a number of companies have begun pondering the
issuance of "special one-time dividends." It's a phrase you're
likely to hear a lot more about as the upcomingearnings season gets
underway.
In late July,
Choice Hotels (NYSE:
CHH
)
announced a bold one-time dividend of $10.41 a share (the stock
trades for around $30), andCEO Steve Joyce didn't mince words on
the company's quarterly conferencecall . "Tax rates on dividends
are never going to be better. I don't know how much worse they're
going to get, but they are going to get worse. And so, we viewed
this as an opportunity to take advantage of what will probably be
the lowest tax environment for dividends for the next 10 or 15
years."
What's to gain...
At first blush, there may seem to be little gain in pursuing stocks
that are about to deliver a huge cash payout. After all, the
soon-to-depart cash is already included as part of a company's
value, so any big payout is bound to reduce a company's value by a
commensurate amount, right? Well, studies have shown that when a
company announces plans to issue a one-time dividend, its stock
moves higher (relative to themarket ) by roughly 3% during the next
two trading sessions, eventually positing a near 4% gain after
three months. Of course, once the stock goes ex-dividend, its value
drops by the size of the dividend, though those just-noted gains
remain in place.
If companies are thinking about these special payouts, then why
haven't many taken action already? A study by Goldman Sachs found
that 50% of all one-time dividend payments in the past 10 years
were made in the fourth quarter of the year. This year's fourth
quarter starts next week.
Will companies wait until the quarter's end to see whether a
last-minute change alters tax policy and preserves dividend tax
rates near current levels? History says no. In the final months of
2010, lawmakers hotly debated tax changes (in the end deciding to
preserve the status quo). Many companies weren't going to wait and
see how those debates played out. "2010 saw the highest number of
one-time dividend announcements, more than double the run-rate of
2000-2011 period," note analysts at Goldman Sachs.
A handful of companies have already started to take action. In
the past few quarters, we've seen
AOL (NYSE:
AOL
)
,
Booz Allen Hamilton (NYSE:
BAH
)
,
DSW Inc (NYSE:
DSW
)
.,
HCA (NYSE:
HCA
)
and
Warner-Chilcott (Nasdaq:
WCRX
)
, which I
recently profiled here
, all issue one-time cash dividends. These companies are simply the
vanguard of what is likely to become a major theme of the fourth
quarter. Many surely note what happened to AOL on Aug. 27, when the
company announced a special one-time $5.15 a share dividend.
Naming names
You can dig up your own candidates for one-time dividends by using
screening tools. I've started the process by establishing the
screening criteria you should use. First, look for companies
withfree cash flow yields of at least 5%. These are companies that
are generating lots of cash and need not worry that cash balances
will run into trouble after a one-time dividend payout. Second,
look for companies with debt-to-equity of less than 25%. Lastly,
find companies that have at least 20% insider ownership. After all,
these are the folks who stand to reap some of the biggest benefits
of one-time payouts. Here are a few stocks that meet these
criteria:
-
Och-Ziff Capital (NYSE:
OZM
)
, an asset-management firm with $1.25 billion in gross cash and
roughly $700 million in net cash.
-
Franklin Resources (NYSE:
BEN
)
, anothermoney manager , which carries more than $500 million in
excess cash on its books, after its debts are accounted for.
-
Molex (Nasdaq:
MOLX
)
, an electronic components maker that saw cash rise by $100
million and debt shrink by $100 million in fiscal (June) 2012. It
now has $400 million in net cash, the highest level since fiscal
2006.
Risks to Consider:
Much of the stock price boost form these announcements comes
soon afterwards, so you may not need to stick around for an
extended period -- especially if you don't actually want to receive
the big dividend payment when it comes, typically a month
later.
Action to Take -->
There could be a wide range of companies looking at special
one-time dividends in the coming quarter. So this is a good time to
screen for companies that have begun to develop cash balances that
are far above historical norms. The companies I mention above are a
good place to start looking. They can provide a solid short-term
boost and some extra cash for your portfolio.
-- David Sterman
P.S. -- Regardless of what Congress does about dividend taxes,
there's still one investment that makes sense in just about any
market environment. It's in a "private" stock market where Mitt
Romney, Bill Clinton -- even rock singer Bono -- have made a
fortune over the years. And now, we've found a way for regular
investors to get in on the action. Go here to see our special
report.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.