In Defense Of Special And Variable Dividends
Summary
- Many investors won't touch stocks that don't pay regular same-sized dividends on a monthly or quarterly basis.
- You're missing out on a bunch of good companies that don't follow the standard American practice.
- For one example, consider Brown-Forman and its much higher than stated yield.
One of the bigger differences I've seen between US-based and non-US investors is their feelings toward dividends. American investors have a heavy preference toward companies that pay a regular at least quarterly dividend, and always maintain or increase that level of payment. Foreign investors are much more forgiving toward less-than-quarterly dividend payments and variable payout levels.
Having been raised in the US and accustomed to its model, there's something nice indeed about steady-to-rising dividend payments that arrive frequently. I certainly understand the comfort and familiarity that comes with this approach. But let's play devil's advocate for a minute. The more I invest in foreign companies, the more respect I've built for the other model - even if it's not my personal preference.
For the sake of not getting too far into the weeds, I'll stick to a US company, Brown-Forman (BF.B) (BF.A) that uses a less traditional dividend payout model. Brown-Forman, for those unfamiliar, is the maker of Jack Daniels and other leading liquor brands. It is also a classic Dividend Aristocrat. It's now racked up 32 years of consecutive dividend increases. That comes with an asterisk though.
Hidden Yield
I've written several articles over the years here on Seeking Alpha about Brown-Forman, in fact, I was pounding the table on it when it was in the high-30s (split-adjusted) in 2016. One of the most common points of contention in the comments sections on Brown-Forman articles was that the dividend yield was simply too low.
At the time, it was yielding 1.5%, which was its highest yield dating back to 2012. Brown-Forman is never a high-yielder in part because the stock usually trades at a high PE (low earnings yield) and management doesn't elect to run a high dividend payout ratio. Combine the two, and the stated dividend yield is never going to be all that high.
And now, with the stock price up lately, the stated yield is down to 1.1%. Despite BF stock being a Dividend Aristocrat, you'd think this stock was practically useless as a yield vehicle at first glance. That'd be wrong though. Enter the special dividends.
In 2012, realizing the strength of its balance sheet and the favorable level of interest rates, Brown-Forman issued a sizable chunk of debt and immediately paid shareholders $1.60/share (split-adjusted) in dividends. At the time, Brown-Forman was paying 41 cents a year in dividends on its common stock. So, in one fell swoop, the company paid out four years' worth of dividends on its stock to its loyal long-term holders.
As a result, a holder in 2012 got paid $2 in total dividends on a stock that was trading around $25 at the time. That amounts to an 8% yield for that particular year on a stock that internet financial portals never showed as yielding more than 1.6%.
Fast forward to 2018, and it's happened again. In conjunction with BF's (slightly unusual) 5:4 stock split this year, Brown-Forman paid out another $1/share special dividend. Brown-Forman stock is currently paying 63 cents a year in dividends regularly. As such, this special dividend represented more than six quarters worth of dividend payments. Suddenly that yield doesn't look quite so low.
An investor who bought into Brown-Forman in the fall of 2012 paid about $25/share. As a result, they've doubled their money on a capital gains basis. In addition, despite never showing a stated yield of more than 1.6% since 2012, that purchase of BF stock has now returned $3.82 in dividends, representing a 15% return of capital via dividends over the span of 5.5 years. That works out to a total annual dividend yield in the high 2s, despite the chart showing the yield being way down in the low 1s over that stretch.
I'm not going to say a total dividend yield in the highs 2s is incredible. But for one of America's great businesses: a high profit margin, high moat growing EPS machine with exemplary management, you could do a lot worse.
Hypothetically, if management paid out those special dividends as an increased regular dividend, BF stock would get a lot more attention in the dividend growth investing community. A high 2s overall yield is sufficient to get on many people's radars, whereas the stated 1.1% dividend yield is going to cause most people to take a pass.
If you're owning as a long-term investor, it hardly matters if the dividend comes in a lump sum or spread out slowly on a quarterly basis, however. Brown-Forman's approach gives the company a great deal of flexibility. In lean times, they have no pressure to freeze or cut the dividend, since it represents such a small portion of earnings. In good times, they can spit out more special dividends.
In 2012, there was some criticism of management taking out debt to pay the special dividend. But, truth be told, hundreds of companies have been doing this - they just do it gradually over the course of years, rather than all at once. The consumer staples stocks are in trouble now because people are realizing that much of the dividend and buyback frenzy of the past five years was paid for with borrowed money. With rising interest rates, the debt-fueled capital return programs are now losing appeal. In a way, there's something respectable about Brown-Forman's alternative approach.
Again, I'm not here to say what way is better. What I will say is that the more I invest, the more I respect foreign firms with variable dividends, along with the oddball US company like Brown-Forman that deviates from standard dividend practice. If nothing else, I'd urge dividend investors not to rule out investing in a company merely because it does something other than pay the same-sized dividend payment on a quarterly or monthly basis.
This article was written by
Ian worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian's Insider Corner service provides live chat, model portfolios, full access and updates to his "IMF" portfolio, along with a weekly newsletter which expands on these topics.
Analyst’s Disclosure: I am/we are long BF.B. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (62)
When you get into your 60's and older waiting a year for your payout is like an eternity. Also if a company only pays once a year and if they are not an established dividend achiever then your risk of getting anything becomes a lot larger. It may cost the company some money to pay out the dividend, but it forces them to be disciplined and work harder for their shareholders. And the alternative to your question would be is how many people have the financial discipline to be able to wait a year for their salary to be paid?
On the other side of this debate I brought up my wife's and my portfolio's and compared their performance. My wife is very conservative and only invests in very low risk investments, while I like high yield investments. Her portfolio grew at average 3.5% since 1996, while mine grew at over 7% despite having gone through 3 collapses and as of yet not recovering fully from the last one. Now I am not as good as some investors are but I think that a more agile investor could have done even better.
Now I think that a few irregular dividend payers would be fine, just don't make them the entire portfolio.
I do see investors as purchasing whatever companies will help them achieve their personal investing goals.
but also have growth stocks which often
grow faster than a dividend stock. When
it rises, will sell partial and put that money
into dividend payers.Shake it up !
Disagree. Let say you plan to keep stock for 10 years (ASSUMING THAT COMPANY BEHIND IT IS REALLY GOOD) but not DRIP. What do you prefer: to receive equal dividends each year or to receive 10x of annual dividends in year1 and nothing in other 9 years. You can invest these 10x dividends in another stock and have better "time IN market" profile. I'd prefer 10x case with obligation to keep stock for 10 years .Anyway, thank you for good paper. Brown-Forman sits on my watch list from 2007 and I always thought that yield is too low but didn't think about their specials. Does BoD have commitment to pay special dividends in future?SDS
would be a bonus.
Favorite sentence: "
In lean times, they have no pressure to freeze or cut the dividend, since it represents such a small portion of earnings. In good times, they can spit out more special dividends."Same applies to my other holding - Ford. People cry about not growing div, but I believe companies are better off with smaller divs and special divs if times are good.
