The special dividend variable is quickly turning into a significant Wall Street anomaly that will have unintended consequences. Without a precedent it's difficult to forecast exactly what will happen, but we've come up with three likely consequences:
Consequence #1- Those companies who prepay 2013 dividends and beyond will become less attractive to income funds over the next year. This is an unfortunate effect for individual investors who own these stocks in tax deferred accounts because the dividend tax hike has no bearing on them anyway. Costco (COST) is paying a $3 billion dividend which will be completely financed through borrowing. Does that help or hurt individual investors who own Costco in a tax deferred account? The additional debt obviously hurts them. Oracle is paying three quarters worth of dividends in December with its largest shareholder CEO Larry Ellison receiving a one time payout of $198.9 million. It's the insiders who are benefiting the most from these one-time payouts. Long term individual shareholders will have to deal with unintended selling pressure in the aftermath of the one-time payouts.
Consequence #2- Any company that chooses not to participate in the special dividend will become more attractive to income funds in 2013. The list of 2013 dividend payers is growing shorter by the day. Income funds will have to adjust their holdings to compensate for this change. Many analysts are putting pressure on special dividend holdouts like Apple (AAPL) to join the masses, but perhaps Apple will become more attractive to dividend funds by choosing to maintain its quarterly schedule. Stock demand and the associated price appreciation generated from income funds is more lucrative over the long run than a one-time dividend payment. At this point, Apple's smartest move is to stay put.
Consequence #3- In the short run, non special dividend participants will face selling pressure as institutional money managers re-allocate to maximize exposure to the anomaly. This window will only last until mid December. As soon as the ex-dividend dates pass (majority are on December 10th or December 14th) these money managers will immediately transition back. Apple's refusal to issue a special dividend is causing a third wave of its sell-off that began on September 21st. The first wave was caused by institutional re-balancing due to Apple's 74.9% YTD returns, the second wave was caused by the hangover effect of President Obama's re-election and the third wave is being caused by special dividend posturing as funds sell Apple in order to gain exposure to the dividend bubble. This new variable is what caused Apple to deviate from its weekly pattern on Friday. As soon as funds became convinced that Tim Cook wasn't going to participate, they began transitioning out of Apple for the short run. For Apple investors, this means you want to have cash on hand to buy the third wave of the dip.
Sell-off fatigue may be settling in for those whose patience is wearing thin, Apple has been in sell-off mode for over two months, even in the midst of its greatest quarter of sales in history, but the market is its own animal and we must continue to identify and adapt to its fundamentals, rather than Apple's. Apple's rally window is coming, this dividend bubble will likely enhance Apple's next rally, but we'll need to endure another dip before it takes off.
Disclosure: I am long AAPL.