One-Time Dividends Today Versus Past (GRMN, LTD, MSFT, AXE, INSP)

Dividends reward shareholders through time.  One-time dividends are often thought of as windfall events, although in today’s world it may be getting the dividend payments out to shareholders in the most tax efficient way in case the tax rates end up reverting back to higher rates after 2010.  This morning we have seen a one-time dividend announcement from Garmin Ltd. (NASDAQ: GRMN) on the heels of a special one-time dividend from Limited Brands Inc. (NYSE: LTD).  We wanted to compare these two to the likes of Microsoft Corporation (NASDAQ: MSFT), Anixter International Inc. (NYSE: AXE), and InfoSpace Inc. (NASDAQ: INSP) for some added color.

Some do not like one-time dividends.  A steadily higher dividend and a promise to hike dividends down the road offers shareholders a benefit today and a benefit tomorrow from the higher income.  But the one-time dividend only helps holders at the record and payout dates.  One-time dividends can sometimes be bad for future shareholders who have to value a company with less cash.  We wanted to look at one-time dividends of the past and see if these new one-time dividends are good or bad for shareholders on an ongoing basis.

Garmin Ltd. (NASDAQ: GRMN) announced this morning that it will pay a one-time increase to $1.50 in its annual payment rather than $0.75 to holders of record on April 15.  The company is also moving its domicile of incorporation to Switzerland from the Cayman Islands to Switzerland if and after the shareholder vote on May 20.  Garmin has almost $1.8 billion in cash and long-term investments as of the end of 2009, and with roughly 200 million shares, this will take out about $300 million from the company coffers rather than the usual $150 million.

The vote from Wall Street is that this one-time dividend hike, as the company said was due to its strong results and cash position, is good.  If you bought shares yesterday around $35.30, the yield is 4.2%.  If you buy today at $36.65 the yield is about 4.08%.  So far the reaction is a very favorable one.  Shares are up 3.8% at $36.60 but the stock is up on thin volume.

Limited Brands Inc. (NYSE: LTD) earlier on Monday declared a special dividend of $1.00 per share and it simultaneously authorized a $200 million share repurchase program.  We had roughly $1 billion listed as the cash and equivalents in the most recent balance sheet, and with close to 322 million shares this will chew up about one-third of its cash.  Add in the buyback and Limited will have used half of its cash.

As far as whether this was good at Limited, it was in-line with what the dividend was.  Shares closed up $1.00 at $24.71 yesterday after the Monday evening news.  The newly authorized $200 million repurchase program includes $31 million remaining under a prior $250 million plan.  The company has advocated  dividends, spin-offs, buybacks, and other shareholder-friendly initiatives throughout its history.

As noted, some dividends are good.  Some are not.  Take Microsoft Corporation (NASDAQ: MSFT).   Microsoft’s special $3.00+ one-time dividend was meant to partly clean out the coffers after a generation of building the mountain of cash.  But the split adjusted price of the time was roughly $24.00 if you average out the November and December prices after that.  Shares are close to $29.50 today and the stock was under $20 most recently until about May of 2009.

At the time, Microsoft had no real choice in the matter over what to do with the cash.  The antitrust issues were fresh enough that it could not have done any major acquisition, so it had little choice but to deploy its cash in the manner it did.  Still, the math does not really speak strongly that the one-time dividend did anything for holders long-term.

Anixter International Inc. (NYSE: AXE) had a special dividend of $1.50 paid out in March 2004 and shares were around $29.00 if you average out the prices afterwards.  Its shares rose and rose even if you consider that the 2009 lows took it all the way back down.  At $47.00+ today, it is hard to say that the company hurt itself with a one-time payment.

And we can’t leave off the case of InfoSpace Inc. (NASDAQ: INSP).  In Jan-2008 it paid out a special $9.00 dividend and in May-2007 it paid out a $6.30 dividend.  That took the company’s cash down to more of a normalized operation level and it now sits on roughly $225 million in cash and equivalents.  It depends upon how you look at the company’s disappointing history to say whether this was a good deal for holders.  With a market cap of $400 million it is not impossible to rule out another payment ahead.

InfoSpace could pay out more than $6.00 today if it wanted to take its cash down to the wire and leave just enough to close out its liabilities.  If it lives up to its analyst estimates, that is doable.  If you owned before and held on since the first one-time and second one-time dividend, this made at least some sense for the company unless you think it could have acquired itself into a better position with the cash.

There is a quote from a WSJ article in 2004 which I have saved on the matter which says: “Special payouts are good news for shareholders, of course. But some analysts warn investors not to get excited about these windfalls, saying that special dividends are not necessarily an indication of better things to come at a company or a reason to buy a company’s stock.”

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JON C. OGG