Which Companies Might Still Declare a Special Dividend? Looking for Them Has an Added Upside

Corporations are hustling to shell out special dividends before the end of the year to ensure shareholders will have at least one last payout taxed at no more than 15%. Costco (COST) recently announced it will spend $3 billion to shell out a huge $7 per-share special payout. Wynn Resorts (WYNN) reported a special $7.50 dividend and HCA Healthcare (HCA) is making a special $2.50 a share payout before year-end.

The big push is ostensibly to show investors some love by being sensitive to their future dividend tax bills. In fact, it’s also often management that is taking care of management; Steve Wynn who owns about 10% of outstanding shares is clearly helping his own tax bill.

Moreover, the recent Street frenzy to identify which companies might be next to announce a special dividend seems to suggest that’s something worth investing ahead of. Chasing a special dividend is actually sort of stupid when done in isolation. Investing today to have a chunk of money returned to you in a few weeks that you have to pay tax on? No thanks.

The potential value in hunting for special dividend candidates is that it can be a nice way to identify companies that have a track record of being shareholder friendly. That’s what matters longer-term. Just be aware that going forward shareholder friendliness might shift more toward stock repurchases if dividend tax rates do rise sharply.

Ample cash is obviously a key element to look for. That would seem to lead to the likes of Apple (AAPL), Microsoft (MSFT) and Exxon Mobil (XOM), which have mega piles of cash.

AAPL Free Cash Flow TTM Chart

AAPL Free Cash Flow TTM data by YCharts

But much of that cash was from foreign earnings, and remains parked outside the U.S in a protest against what they deem to be too-high corporate tax rates. Rules dictate that dividends must be paid from earnings sitting in U.S. accounts. So it’s less likely that companies with big foreign cash stakes will repatriate those earnings to make a special payout. If somewhere down the line broad tax reform were to lower the corporate tax rate, or offer a one-time repatriation holiday rate, then you might see some special payouts from global players.

Money manager Peter Anderson, in a research note posted at Morningstar shared a recent screen he did to locate some candidates for special dividend payouts. He focused on regular dividend payers with a market cap of at least $1 billion that have debt/capital ratios below 50%. To make sure no company is overextending itself for a one-time dividend thrill, Anderson then drilled down to companies whose free cash flow yield is at least triple its dividend yield, and its cash position was at least 10% of total market cap.

Among the domestic-heavy players on his list is money manager Legg Mason (LM). Interestingly, another money manager/fund conglomerate, Franklin Resources (BEN), has already announced a special dividend. With nearly $900 million in cash and a debt/equity ratio below 30% Legg Mason has the ability to make a special payout. But it’s not exactly a long-term dividend Boy Scout, opting to slash its payout during the financial crisis.

Sticking to the money management theme, T. Rowe Price (TROW) looks intriguing (It’s not on Anderson’s list.) T. Rowe Price has managed to increase its dividend for at least 25 years, earning a rare seat at Standard and Poor’s Dividend Aristocrat table. It has zilch long-term debt, and its cash stake has been rising.

TROW Cash and ST Investments  Chart

TROW Cash and ST Investments data by YCharts

Another domestic player on Anderson’s list is Cardinal Health (CAH). Its debt-to-equity is below 50% and it sure looks like it can afford a special payout.

CAH Cash and ST Investments  Chart

CAH Cash and ST Investments data by YCharts

Cardinal Health’s 12.7 PE ratio is below the market average, and it is currently rated Attractive by YCharts. At a 20 PE ratio T. Rowe Price isn’t as cheap, but its current p/e remains right in line with where it was pre-crisis. The fund behemoth is currently rated Neutral by YCharts, as is Legg Mason.

Carla Fried, a contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine.

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