Tim Hortons: Special Dividend On the Way?

Special dividend. Those two words are often all it takes to move a stock upwards, as investors jump in looking to make a fast buck.

Take TSX Group for example: When it announced a $2.50 per share special dividend in late 2003, its otherwise stagnant share price increased in-step, climbing 12.5% in a month.

And in early 2005, a call for Algoma Steel to pay out a special dividend, which they did later that year, spurred a quick C$10 increase in the stock.

That said, expect investors lining up to buy Tim Hortons Inc. (THI) shares and boost the laboring stock to new heights after UBS analyst Peter A Rozenberg suggested the cash-rich company could reasonably issue a special dividend.

"We think Tim's strategic options are underpinned by industry-leading profitability, a strong balance sheet, and a low dividend payout ratio," Mr. Rozenberg said in a note to clients, estimating the company could offer a special dividend for $767 million or $4 a share, even after investing its surplus cash into its top priority, new store growth.

Another option is to increase its dividend by 65% from C31 cents to C51 cents, applying a 35% payout ratio up from 21% in 2007, he added.

Alternatively, Mr. Rozenberg said the company could utilize their free cash flow to buy back shares or become a player in the M&A market.

He reiterated his 'buy' rating on the stock and left his C$42 price target unchanged.

Comments

[Malkiel]

I think they should consider offering a "donut dividend"--every shareholder of record for the quarter would be entitled to unlimited donuts and coffee until the first day of the next quarter...