Investing

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

Support.com Inc. (NASDAQ: SPRT) saw its shares rise about 20% to over $2.30 in December, after declaring a $1.00 per share special cash dividend. That said, its daily high was only $2.20 after the news, and it would have a $2.44 high on January 10, 2020, if it was unadjusted for the special dividend that was paid out in December. All things considered, the $1.25 current price would be against a $1.00 dividend-adjusted price. The company now has only a $22 million market cap, and that payout was part of the company’s ongoing capital allocation review.

Perhaps the large question now is what would happen if other well-known companies decided to use their treasure troves of cash to pay out special dividends. There is no one path that companies use for determining how to allocate capital after they have grown and grown their cash piles. That said, some of these companies may never adopt much more than a plan just to hold cash at a certain level.

Alphabet Inc. (NASDAQ: GOOGL) just reported earnings, and the company ended 2019 with a total of $109 billion in cash and equivalents. The company also held almost $14 billion in “non-marketable investments.” With about a $1,430 share price, its market cap is $985 billion. Many analysts have raised their price targets rather than cut them, and Alphabet allocated $25 billion in 2019 that could be used to buy back shares. If the company is going to keep building cash, it could easily afford to return the equivalent of about 5% of its current share price without worrying too much about where $50 billion or so would be “adequate cash” for a company that pays no regular dividend.

Apple Inc. (NASDAQ: AAPL) had a treasure trove of $107 billion or so in cash at the end of 2019. Its cash would be far greater if the company wasn’t buying back so much stock via its endless share repurchase program. Apple even shrank its free float of shares by 7% during 2019, despite an 85% gain over the course of past year. Apple also is spending an average of $15 billion to $20 billion each quarter on share buybacks.

On January 21, 2020, Costco Wholesale Corp. (NASDAQ: COST) issued an outright denial that the company was planning a special dividend. The call was in response to a JPMorgan analyst calling a special dividend likely because the company had accumulated some $9 billion in cash, which was actually $10 billion as of November 30, 2019. The question to ask now though, with a $130 billion market cap and $300 stock price, is if a special dividend would offer more “juice” to shareholders. The current dividend of $2.60 per share generates a yield of less than 0.9%. Is it fair to assume that Costco can repeat its massive growth of the past decade all over again? This was just a $150 stock at the end of 2016.

Microsoft Corp. (NASDAQ: MSFT) paid a one-time special dividend of $3.00 back in November of 2004, on top of what was then an adjust eight cent per share quarterly payout. The payout was worth about $30 billion or so at the time, and Microsoft then had more than $50 billion of cash on hand. Zoom forward to 2020 and Microsoft’s cash pile is closer to $134 billion, while its market cap is roughly $1.3 trillion. Microsoft already has a regular dividend of $2.04 annualized per share.

Facebook Inc. (NASDAQ: FB) has rapidly grown its cash as well, ending 2019 with about $55 billion. With no regular dividend and no long-term debt worth mentioning, it goes without saying that Facebook has become a proverbial cash cow. With a $207 share price and a $590 billion market cap, if Mark Zuckerberg wanted to he could pay out the equivalent of 5% of the current market cap and still having ample cash (more than $20 billion) to fund its daily operations and to cover any cash acquisitions it desires. That said, Facebook recently added $10 billion to its share buyback plan, and that was on an approximate $24 billion dating back to 2017.

The same argument could be used for the major banking giants in the United States. What if the Federal Reserve decided that one-time dividends would be better than having companies commit more than their entire annual income to stock buybacks and regular dividends? That might become a more disciplined earnings and cash maintenance approach than setting the bar too high on regular cash dividend payouts, and it’s not like they need (or even could use) their excess capital outside of mandated reserves to look for acquisitions. That said, that’s just not how banks have done things in the past, and the largest banks and financial institutions have all been under closely watched regulatory eyes since the Great Recession.

Most income-oriented investors tend to look for companies that pay regular dividends. Then again, some companies just have accumulated too much cash, and there is an argument about just how useful and socially responsible share buyback plans are in many cases.