Investing

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

Jon C. Ogg

Published: February 4, 2020 11:45 am

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.

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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.

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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.