Who Won't Be Giving You A Special Dividend

by: Stephen Rosenman

Back on January 4, I dubbed 2012 the "Year of Special Dividends." The call turned out to be prescient. Of the seven names on my original list, five delivered large one-time dividends (the one that didn't was acquired at a hefty premium; the other -- Stamps.com -- might yet sneak in a special dividend.) My reasoning: Corporations with large insider positions would send out giant special dividends before the 15% dividend tax rate expires and is replaced by a tax approaching 43.8%. As I wrote:

The tax change should fuel another outpouring of "special dividends" near the end of 2012.

Looks like my article was spot on. Almost every day, another company announces a special dividend as boards rush to beat the calendar. So far, Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), Whole Foods (WFM), Costco (NASDAQ:COST), The Buckle (NYSE:BKE), National Beverage (NASDAQ:FIZZ), Atrion (NASDAQ:ATRI), Armstrong Worldwide (NYSE:AWI), Werner (NASDAQ:WERN), Limited Brands (LTD) -- to name a few -- are cramming every dollar they can find into this year's special dividend. Over 100 companies have declared special dividends this year -- and 2012 isn't over yet.

From The Wall Street Journal to Barron's, the media has picked up the story. It has been "The Year Of Special Dividends," as I predicted in a series of articles here and here.

Guessing who will be next to offer a special dividend has become a bit of a mania. In predicting the "next" company to declare a special dividend, forecasters often overlook the two ingredients needed for a corporation to make a juicy one-time payment to its shareholders.

1. The company's board has to have its interests aligned with shareholders.

What's that mean? Board members must have large share positions so that they are motivated. You'll notice insiders have large stock holdings in The Buckle, Limited, Costco, Wynn, Arden. They want that special dividend as much as you do.

That's why Gap Stores (NYSE:GPS) didn't declare a special dividend, depressing investors who had hoped for a big check in the mail this year. Only two members of the board have meaningful stock positions. When Gap acknowledged to Reuters there would be no bountiful dividend bonus, the stock sank 10%.

2. The company has to have the money.

Many multinational companies hold almost all their money offshore. Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) have their dough tied up overseas -- impossible to access without paying U.S. taxes. Apple (NASDAQ:AAPL) could hand out a special dividend, but it would stretch its U.S. balance sheet. Almost 70% of its cash is stuck within its foreign subsidiaries. Apple's got plenty of U.S. dollars -- $38 billion -- but the cash is needed for acquisitions, regular dividends, capex and share repurchases. Don't expect a special from Apple.

Special dividends require special companies. It pays to invest with boards that are shareholder friendly. This year, they really had your back.

Disclosure: I am long AAPL, BKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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