I've been looking for companies that reward their shareholders. Limited Brands (LTD) handed out two special dividends to shareholders in 2010, totaling $4 a share. That caught my eye. Up until 2010, LTD had sent the same 15 cents to investors for each of the last 24 quarters; they hadn't dropped a special dividend since 2004. Is this the start of a more "special" relationship with investors or merely a one-time largesse?
For those unfamiliar with LTD, the company is composed of Victoria's Secret, Bath and Body Works, and La Scenza (currently a smaller portion of the business that sells overseas). LTD has the prerequisites needed to be mega shareholder friendly: a big insider position and bountiful cash generation. LTD has a whopping 17% insider holdings. I find companies with large insider positions tend to look for ways to reward shareholders. It makes sense: Management and shareholders' interests are aligned.
LTD throws off a ton of cash, something that is new. In the past, LTD spent heavily on capex. LTD literally poured money into capex from 2005 to the end of 2008. This four year span saw $2.2 billion in capital expenditures, an average of $550 million a year. That pace has dropped off considerably. In 2009, LTD spent $202 million on capex. The company projects $275 million this fiscal year. Now that LTD has decreased its capex, there is more cash available for shareholders. For instance, as LTD backed off its capex, FCF increased dramatically. FCF has gone from $16 million in 2007 to $970 million in 2009. LTD forecasts $800 million this year. More over, the investment in capex paid off. Operating cash flow has risen from $600 million in 2006 to well over $1 billion last year. LTD now can send far larger checks in the mail to shareholders.
In their earnings release of Q3, management says: "We have been and remain committed to returning excess cash to shareholders through a combination of ongoing regular dividends, share repurchases and special dividends." LTD has reached a new phase in its business. Investors will find the LTD increasingly shareholder friendly. A few companies have been giving special dividends on a regular basis: Witness the Buckle (BKE). My prediction: expect more special dividends from LTD this year.
Disclosure: I am long LTD, BKE.