Special Dividends: The Popcorn Effect

by: Spencer Ross

Special Dividends (SD) are a one-time payout that are generally much larger than a company's regular dividend. The recent impetus for companies to declare a SD is ostensibly to avoid the perceived Fiscal Cliff, whereby come the new year dividends may be subject to the plus 40% tax rates instead of the current 15%.

Just about every kid (and grown-up) enjoys making popcorn. At the beginning you get some early pops, and then the frequency increases, until you get the staccato popping when most of the kernels turn. And then you reach a plateau and the cessation. That just about describes Special Dividends in 2012.

Thus far this year about 100 companies have already declared Special Dividends, but 59 have occurred from September to mid-November. However you want to define, it the early popping has passed. The frequency has increased in the last 2 weeks with Wynn Resorts (NASDAQ:WYNN), Movado (NYSE:MOV), Tyson (NYSE:TSN), Costco (NASDAQ:COST), National Beverage (NASDAQ:FIZZ), Mastech (NYSEMKT:MHH), Stein Mart (NASDAQ:SMRT), Tellabs (NASDAQ:TLAB), Culp (CFI), The GEO Group (NYSE:GEO) just to name a few declaring SDs. Over the next 3 weeks or so, there exists the possibility of increased frequency or perhaps even some staccato popping as the year-end deadline approaches. But after that, it's all over as 2013 is ushered in.

Buy everything? Ignore the entire issue. That would be neither feasible nor wise. Special Dividends are a short-term though potentially lucrative opportunity to uncover even a few likely candidates before the dividend is declared and put down a few low-risk bets.

Case in point: Late Friday, Alexander's (ALX) declared a whopping $122/shr SD. Later, we'll look at why ALX was a prime candidate (nothing like hindsight!) But in order to make such crystal ball predictions we really need to understand the make-up of the most likely SD candidates.

Here are 7 guidelines to consider in looking for where the next big SD may come from:

1. Cash is king. Although it is possible, a company with little cash on its books, is not going to declare a SD. You need to have generous amounts of cash/share. What makes the cash number even sweeter is where the cash/shr is a high percentage vs. the current share price.

2. Companies with low, or non-existent debt would be better candidates. If a company has a lot of debt it's much less likely to declare a SD.

3. Companies with an already existing dividend policy are more likely to declare a SD.

4. Insider ownership. Since the insiders will be principal beneficiaries of a SD, it's more likely that a company with a high percentage of insider ownership will declare.

5. US-based. Since the tax rules are a US issue, foreign companies or US companies that have a large international component would not be in the running.

6. Companies that generally need excess cash either because they are expanding rapidly or the nature of the their business, like insurance companies or banks, should also be excluded.

7. Companies whose business is generally going well are more likely to declare than a company whose business or stock price is trending down.

Let's now look back at ALX's $122 SD. How much will that boost the company's $443 share price on Monday is unknown, but it will not be insignificant. Here was a company with almost $100 cash/shr on the books with 59% of insider ownership. It does have more debt than cash and I'm sure for that reason alone I would have left it. Which goes to show that there's no one magic formula that will uncover every SD payer. Having said that, one has to go with the best set-ups.

I am going to avoid the obvious and overcrowded choices of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), etc. The list below are from varied industries where the outright cash/shr on the books, or the percentage of that cash/shr compared to the current price were impressive. I also looked for a healthy percentage of insider ownership and low or non-existent debt. I'm sure I missed many and erred in some of my selections and will no doubt hear from you later on that.

But without further ado, here is my list of 10 speculative recommendations for Special Dividend candidates:

ticker share price ($) cash/shr($) insiders (%) debt level
Outdoor Channel (NASDAQ:OUTD) 7.43 2.33 52 0
Forrester Research (NASDAQ:FORR) 28 10.26 40 0
Argan Inc. (NYSEMKT:AGX) 18.61 13.57 36 0
Learning Tree (NASDAQ:LTRE) 5.53 3.39 58 0
USANA Health Sciences (NYSE:USNA) 41.28 5.31 54 small
VMware (NYSE:VMW) 90.95 10.27 30 very low
GAMCO Investors (GBL0 49 18.69 30 >1/2 of cash
Stec Inc. (NASDAQ:STEC) 4.91 3.99 23 0
Morningstar (NASDAQ:MORN) 63.83 7.25 53 0
Stryker (NYSE:SYK) 54.16 10.16 20 1/2 of cash

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALX, OUTD, FORR, AGX, MORN, LTRE, USNA, VMW, GBL, STEC, SYK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.