Dividend investors are often preoccupied with current dividend yields, which allow them to forecast largely predictable cash flow from their investments. However, far too few dividend investors focus on the often-lucrative approach of identifying future dividend payers and forming positions in them prior to the announcement of dividends. This can be lucrative due to the increase in share price that often accompanies new dividend issuance, which is typically viewed as positive for a stock for two primary reasons. First, the issuance of a dividend is an indication of confidence in future cash flows on the part of management. Second, dividend issuance allows companies to appeal to a broader set of investors, which often increases demand for shares on the public markets. Below, two companies that are highly likely to commence cash dividends in the near future are profiled. Investors in these shares prior to the announcement of dividend issuance are likely to see outsized returns, and although it is impossible to predict with precision when companies will commence dividend payments, the arguments laid out below include a forecast of dividend timing for each company.
Amazon.com (AMZN): Amazon.com has never issued a cash dividend on its shares. This is in large part due to its history of aggressively investing in the business with new product lines, back-end investments in corporate infrastructure and operations, and research and development costs. To date, the perception of Amazon.com as a technology company and its sizeable investments in technology and capacity building have held the company back from paying dividends. However, nearly all large retailers pay a cash dividend to their investors.
In the next few years, analysts expect Amazon.com to slow from its impressive rate of growth of 41% over the past year to 28% for FY 2013. It is the realization of those outsized returns that has made the stock so expensive from a fundamental perspective, with a price-earnings ratio of 186. Over the next 3 or 4 years, as Amazon completes the build out of its infrastructure and lessens the need for cash from operations for investment, it will turn to rewarding investors. Investors who hold shares at the point of initial dividend issuance would likely be richly rewarded.
St. Joe (JOE): JOE has a rich history of dividend payouts, which consistently grew from 1992 through 2007. Due to the real estate downturn in 2007, St. Joe terminated dividend payouts, which coincided with a crater of the share price. Real estate companies like St. Joe's often have attractive dividend yields that attract major institutional and dividend investors, thus a lack of a dividend has suppressed the share price.
Although the Florida real estate market, which forms the basis of St. Joe's earnings stream, has been bleak, there have been signs that the market has bottomed and is now the second fastest price appreciation market in the United States. Therefore, this may well be an excellent opportunity to get into the shares in anticipation of a continuation of the dividend payout.
An ancillary effect of dividend issuance that is especially important in the context of St. Joe is the impact on short sellers. Short sellers must pay dividend yields of long positions in the stock, and many short sellers shy away from positions against significant dividend paying stocks. St. Joe's presently has a tremendously large short position against it, at 44% of available shares. Therefore, dividend issuance, which is highly likely to occur within 2 years due to continued recovery of the Florida real estate market, would likely produce an outsized move up in terms of the share price for St. Joe.