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As the fiscal cliff continues to loom, companies are attempting to take proactive action in the best interest of their shareholders instead of waiting for Washington to solve anything. With interest rates near all time lows, firms have begun returning cash from their flush balance sheets to investors in the form of a special dividend, rather than keep the capital in their own coffers, earning near 0%. These dividends go above and beyond the firms' typical quarterly dividend, and return extra capital to their shareholders.

Whether the fiscal cliff is avoided or not, many still see a tax increase forthcoming, especially for the wealthy, in the form of a dividend tax increase. In order to assist shareholders avoid paying up to double in taxes on dividends received, firms are rushing to pay out before December 31st, 2012. Firms have announced special dividends at a rate 4 times as much as seen this time last year. Is Apple (AAPL) next?

Firms and shareholders have been benefiting (at least in the short-term) from these special announcements of capital distribution as investors hurry to buy into the names for this extra yield. In the short run, this higher demand to be in the stocks has been driving up stock prices as major funds and individuals seek a fixed income search for a return.

Companies most likely to take action and pay an extra dividend to shareholders have certain characteristics in common. Understanding these characteristics can allow speculators to invest in names prior to announcements and get in before potential special dividends are made public. See if you think Apple fits these characteristics or if you can pick the next firms to follow along. Some characteristics include:

  • Firms with little debt - With low debt on a balance sheet, firms do not have exorbitant interest payments to make for borrowed capital. Having a low weighted average cost of capital (WACC) allows firms to minimize negative impacts from not paying down debt with the extra capital, and instead of keeping it in a bank for a rainy day, they can allow shareholders to do as they please with it, including reinvesting it back into the firm. (ex. Most tech firms with no debt)
  • Firms with high positive cash flow - It would not benefit companies who do not have a consistent source of positive cash flow each month to make this extra payout. Firms who have reliable earnings and earnings growth potential can make this extra expenditure to keep shareholders happy. (ex. Microsoft (MSFT) which is a cash generating machine)
  • Firms with a high concentration of shareholder influence (tightly held firms) - Companies with few extremely large shareholders with enormous influence over the firm will make the payments to their large holders. This was seen with Las Vegas Sands (LVS) recently, as majority shareholder Sheldon Adelson clearly wanted to benefit from the lower tax rate this year and had the firm make an extra dividend payout of $2.75 per share while also raising its quarterly dividend. Another company which shows similarities to LVS in this matter could be Wal-Mart (WMT) held in large part by the Walton family. (ex. LVS, WMT)
  • Firms with little desire or opportunity for large capital expenditures - Paying out these extra dividends could lead to unforeseen opportunity costs. Firms paying out the extra cash are determining now, that they will not want to use that cash for a large acquisition or capital expenditure like a factory upgrade. For firms with easy access to the debt market and great credit, they can always borrow money if they want to make a big move next year. Amazon (AMZN) has already looked into borrowing, to lower its WACC, while they determined the time was right for a special dividend payout. (ex. AMZN)

Would AAPL benefit from this extra dividend payout?

It's not news to anyone that AAPL is flush with cash. As of September 29, 2012, Apple's quarterly report showed their accumulation of cash has grown to $10,746,000,000, or $10.746 billion, while its total assets climb above $176 billion. The majority of Apple's debt is comprised of accounts payable (typically to partners or vendors), not money borrowed, meaning Apple is in a perfect financial situation to make this payout. Along with extremely low debt balances, Apple has shown in the past their passion to innovate from within rather than buy out other firms, which would allow Apple to spend the cash now, instead of saving for a rainy day.

Apple has just begun to pay a quarterly dividend for the first time last quarter. Apple is becoming seen as a great source for a fixed income, as it is able to generate enormous sums of cash, even as it reinvests into itself and into its partners each quarter. A special dividend would not only assist current shareholders including all the hedge funds and mutual funds who hold 68% of the float of the stock, but also each retail investor who holds the stock in retirement accounts, college savings plans, and individual trading accounts.

A final motivation for Apple to utilize this time for a special dividend is its share price. Although the firm has risen off of its recent lows in mid November and has climbed 60 points or approximately 12%, the stock has had a large sell off over the past 3 months since its top above $700 in September. Much of the recent selling pressure has been attributed to investors taking capital gains now, while those tax rates are low as well. Announcing a special dividend will force investors, especially large institutional holders, to think twice before dumping stock to realize gains. Will Apple be next to follow along the road of special dividend announcements?

Source: Should Apple Issue A Special Dividend?