Many companies have captured headlines recently with announcements of special dividend payments. In November alone, 173 companies announced special dividends, up 137% from the previous eight months combined. Shares of these companies have jumped as much as 6%, as management and large shareholders try to avoid higher taxes next year by paying out excess cash before the end of December.
Although the share-price increase following these announcements may be lower than expected, there's still a way for investors to benefit from this upswing in prices -- by anticipating these special dividends. And while a long-term position in dividend payers should only come after more in-depth analysis, getting in a position before the company announces a special dividend is great for a quick profit.
[Note that the payment of a special dividend does not mean the company will suspend its current dividend policy. It simply means the board of directors thinks returning the money to shareholders is a better use of cash.]
After all, politicians are still duking it out, and we have yet to see any resolution to the so-called "Fiscal Cliff." Politicians have drawn a line in the sand and it looks like, at least for now, taxes on dividends for those in the higher income brackets will be going up next year.
As it stands, the sunset on the Bush-era tax cuts have taxes increasing from 15% to as high as 43.4% and 39.6% at the highest tax bracket, plus an additional 3.8% in new taxes from the Affordable Care Act (otherwise known as Obamacare). This means taxes on dividends could almost triple.
The invisible hand at work
The Wealth of Nations, the seminal work by Adam Smith in the 18th century described an invisible hand of capitalism that moved the economy by each individual seeking their own personal gain. This would make for the most efficient allocation of capital and the overall economy would grow as a consequence.
Las Vegas Sands (NYSE: LVS), along with majority owner Sheldon Adelson, has been the best example of this so far. Adelson owns 45.8% of the iconic desert casino company and pays about $47.6 million in annual taxes on the current quarterly dividend of 25 cents a share. With the new tax hikes, Adelson could owe about $137.8 million in taxes next year. Paying almost $100 million in additional taxes is a downer, even for someone with a net worth of $21.5 billion. Paying out the special dividend of $2.75 a share this year, Adelson saves up to $248 million. As noted before, the available $2.75 per share would have eventually been paid out to shareholders, whether through special dividends or an increase in the regular dividend payment next year, which would be taxed at the higher rates.
Adelson is not alone. Members of the Walton family, collective owners of 51% of the shares in Wal-Mart (NYSE: WMT) stand to save a combined $166 million just by shifting one dividend payment of 39 cents a share to December from January of next year.
Before you jump on the special dividend bandwagon...
Here are three key points investors should consider to front-run the news on special dividend announcements:
Individuals with high ownership in a stock -- such as Adelson and the Walton family -- are likely to pressure the company to pay a special dividend to protect their tax bill next year.
Companies with a low amount of debt and high cash flows can afford to return money to shareholders without sacrificing capital expenditures needed for growth.
Companies that already pay a dividend are more likely to bring payments forward or announce a special dividend than other companies that don't.
With these three fundamentals in mind, here are three strong companies that could be announcing special dividends before the end of the year. They're not only appealing for their dividends, but they all have pristine balance sheets and good prospects for growth next year.
1. A housing rebound beneficiary
Williams Sonoma (NYSE: WSM), a specialty retailer of home products, has more than $352 million in cash and only $5.4 million in long-term debt, leaving $3.52 in cash per share. With only a 37% payout ratio, the company pays a dividend of 88 cents per share, which about 2%. With the rebound in housing, the company could see strong cash flows during the next few years, so it can afford to payout some cash now.
2. Support from Obamacare
One of the world's top medical equipment makers, Stryker (NYSE: SYK) is also a candidate for a special dividend. The stock currently yields about 1.5% but only pays 23% of earnings, leaving plenty of room for dividend growth. The company has more than $3.8 billion of cash on its balance sheet and only $1.8 billion in debt.
The shares have been under pressure this year ahead of Obamacare's 2.3% excise tax on medical equipment. While a complete rollback of the tax is not likely to take effect, any negotiated easing could boost the shares. Even if this excise tax remains, then demographics and increased insurance coverage resulting from Obamacare will still provide significant support in the years to come.
3. An online retailer with billions in cash
Founder Jeff Bezos still owns 19.2% of the outstanding shares in retail behemoth Amazon (Nasdaq : AMZN). The company is a cash monster, with $3.9 billion in operating cash flow last year, and more than $5.2 billion in cash and short-term investments on the balance sheet. While the cash stockpile only amounts to $11.48 per share, the company has no long-term debt. Revenue has grown by an annualized 39% during the past two fiscal years, so the Internet giant should have no trouble giving shareholders a holiday treat.
Risks to Consider: Share prices may fall after the announcement bump and directly following the special dividend. In reality, special dividends only transfer wealth to shareholders rather than creating a higher asset value. Investors may want to reassess their holdings after the jump in shares as a result of a special dividend announcement.
Action to Take --> Look for companies with high individual ownership, low debt and good cash flow for clues into the next special dividend payout. The three companies I mentioned here could potentially announce a special dividend payment soon. Even if they don't, their healthy balance sheet and great business prospects are still great reasons for investors to research them further.