Investing

Should Special Dividends Replace or Add to Regular Dividends and Stock Buybacks?

It is no secret that investors love dividends. Many investors have seen one-third to half of their returns over time come via dividend payments. What matters about this strategy is that when a company declares a regular dividend it usually is meant to act as a guiding light that the company is comfortable enough for the quarters and years ahead to keep paying dividends as a reward for its shareholders.

Another type of dividend is less frequently seen by investors: special dividends, or one-time payouts. Companies that pay special dividends often do so on top of their regular dividend payments. Maybe the company sold a business unit, or maybe it is just a massive generator of cash flow from its operations. Whatever the case, using a special dividend and having a policy of reviewing a company’s capital allocations can generate additional interest from investors.

It might not be good news universally though. Paying out a massive dividend comes with some arguments. First, a company may be robbing its treasure trove of cash that could there to defend it during harder times that may come ahead. Investors also have to pay taxes on those dividends in most cases. A one-time payment is not the same as an aggressive strategy of having regular payments that entice income-hungry investors.

24/7 Wall St. has looked at some of the most recent special dividends to see if there is merit to some of the largest tech giants and other cash-hoarding companies that could pursue the one-time option. Some of these companies do not have ongoing regular dividends, and many prefer to allocate their capital toward stock buybacks. We have shown how some of the one-time dividends have worked and how they are paid in various instances, and we have shown how a handful of the cash giants would likely view a one-time dividend based on their most recent balance sheets.

NortonLifeLock Inc. (NASDAQ: NLOK) was down almost 40% at $17.15 on Monday, but that drop was actually due to the shares reflecting its massive $12 per share dividend payment. That special dividend had been declared after the close of trading on January 9, 2020. NorthonLifeLock has a new 52-week trading range of $16.64 to $28.70, but the $28.42 closing price from before the payment would now be $16.42 on a dividend-adjusted basis. Some analysts maintained their existing ratings but adjusted their target prices to reflect that dividend: Credit Suisse (Neutral, target to $14 from $26), Mizuho (Buy, target to $19 from $30) and Robert W. Bard (Neutral, target to $17 from $26).

Tilly’s Inc. (NYSE: TLYS) is a small-cap stock of a company that retails casual apparel, footwear and accessories for younger consumers. At the end of January, Tilly’s declared a special cash dividend of $1.00 per share (approximately $29.7 million in total) to be paid on its common shares with a payable date of February 26, 2020. The company had a $258 million market cap on last look, so this would be more than 10% of its current value. The 52-week trading range is $7.62 to $13.11.

TransDigm Group Inc. (NYSE: TDG) declared a special dividend of $32.50 per share on December 20, 2019. The company had announced that its divestiture of Souriau-Sunbank Connection Technologies was complete and that was a $920 million transaction value at the time. The $32.50 per share special dividend was said to represent close to 6% of its value at that time, and this was the single largest special dividend, even after a $30.00 payout in mid-2019 was preceded by special dividends of $22.00 per share in 2017, $24.00 per share in 2016, $25.00 per share in 2014 and $22.00 per share in 2013. Shares recently traded up at $665.00, but this was a $220 stock five years ago.

Vornado Realty Trust (NYSE: VNO) announced on January 15, 2020, that its board declared a regular quarterly dividend of $0.66 per share, but back in 2019 the company declared a special dividend of $1.95 per share payable to shareholders of record on December 30, 2019. This New York-focused real estate investment trust already has close to a 4% dividend yield, and its latest price of $66.15 comes with a $12.6 billion market cap.

MSC Industrial Direct Co. Inc. (NYSE: MSM) declared a special dividend of $5.00 per share in cash back on December 17, 2019, with an ex-dividend date of January 21, 2020. The company said at the time of declaration that it was initially funding $277 million total payout from its cash on hand and from its revolving credit facility. It currently has about a $70 share price, down marginally from the $71.14 adjust pre-dividend price (or $76.89 before the special and regular dividend was combined). The company had been raising its dividend over time, but that was its first special dividend in more than 15 years.