Last Call for Special Dividends
Go ahead and call me Nostradamus!
Way back in August, I made a prediction that companies would respond to the potential spike in dividend tax rates (thanks to the Fiscal Cliff) by opening up the floodgates on special dividend payments.
And that’s precisely what happened.
In the month of November, 173 companies announced special dividends – compared to only 72 during the same period last year, according to Standard & Poor’s resident number cruncher, Howard Silverblatt.
The payouts have been big, too, averaging about 7% of the current share price.
The good news is, we didn’t miss out on the bonanza.
On September 26, I whittled down a list of 15 potential special dividend stocks to one: Federated Investors (FII). And the company delivered a month later, announcing a special dividend of $1.75 per share.
My purpose for writing today, though, isn’t to brag. Instead, I want to alert you to another handful of special dividend opportunities.
For as Silverblatt says, “It is last call at the bar [for special dividends].” With that in mind, here’s a trio of companies to consider. Before it’s too late.
A Smart Bet, Not a Random Guess
You’ll recall from my previous analysis of special dividend opportunities that I recommend putting risks ahead of potential rewards. After all, a special dividend does us no good if the stock that we purchase to get the one-time payment tanks.
So here’s a refresher on how I screen for the most attractive and prudent special dividend opportunities.
- Yield, Please: Any stock yielding less than 2% is automatically disqualified. Why? Because there’s no guarantee a company is going to actually pay a special dividend. If they don’t, we want to make sure we’re still getting paid.
- Selfish Motives: Call me cynical, but I believe that many individuals are self-serving. And as renowned Wharton School finance professor Jeremy Siegel says, “If there’s big insider holdings, obviously they would communicate to the firm’s management that they would prefer a dividend early.” Yes, obviously. Thus, I insist on insider ownership of 10% or more.
- Buy Low, Sell High: I eliminate any companies trading at a double-digit premium to the S&P 500 Index on a forward price-to-earnings basis. After all, we shouldn’t overpay for the possibility of a special dividend. Instead, we should focus on opportunities where we stand to benefit from capital appreciation, too.
If you forced me to pick one, I’d go with Pzena. It’s sitting on a sizeable cash balance equal to about 60% of the company’s market cap. Plus, it boasts zero debt. Or put simply, it’s in the best financial position to pay a special dividend.
That being said, Pzena is trading slightly above our valuation threshold. Accordingly, I’d look for a pullback below $5.25 per share, which is certainly possible given the stock’s recent trading range.