The Inside Meaning to Recent Dividend Announcements
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the year comes to an end, there are a lot of questions surrounding dividends. Some believe taxes on dividends could exceed 40%, or at least double regardless of the outcome from fiscal cliff negotiations. Yet despite these concerns, and the concerns regarding taxes on public companies, there were some companies with major dividend related news announcements on Tuesday. Therefore, let’s take a look at these companies and what it might mean.
Increasing the Regular Dividend
The purpose of increasing the price paid of quarterly dividends would be to provide a sense of assurance to investors of dividend stocks. Over the last two years, investors have found comfort in high yield stocks, and these stocks have continued to outperform the market due to the security they provide in an unstable market. Companies such as Seagate Technology have made a statement by drastically increasing its yield, by 19%. And now other companies are looking to follow its lead.
It looks as though FMC Corporation (NYSE: FMC) has found the perfect solution to a potential 50% tax hike on dividends, it simply increased the price of its payout by 50%. On Tuesday the company announced that it would be increasing its dividend to $0.135. The company is now paying a forward yield of just 1.00%, which does not put FMC in the category of a high yield investment. However, the stock has performed incredibly over the last four years, with a gain of 140% and has continued to give back to shareholders. During this period it has increased its dividend from $0.05 to now $0.135, therefore investors must assume that market leading increases in yield will continue and that FMC might be a good long-term investment.
Paying the Special Dividend
Rather than paying or increasing regular dividends some companies are electing to pay special dividends. The reason is because it returns capital to shareholders and can be done under the current tax rate. Also, it saves the board and the executives money by saving them on taxes. With that being said, let’s look at the top two market moving special dividend announcements.
Monolithic Power Systems (NASDAQ: MPWR) traded higher on Tuesday by nearly 3.50% after the company announced a special dividend in the amount of $1.00. This news was a bit surprising, as the stock has performed well for most of the last year and is already somewhat expensive compared to its fundamentals. Therefore, this special dividend will cost the company nearly $35.50 million, which is more than double its net income for the last year. As a result, I don’t necessarily agree with this move and will be curious to see what the company uses to pay the dividend, possibly cash?
For the last year I have been begging for a dividend from Spectrum Pharmaceuticals (NASDAQ: SPPI), and on Tuesday the company announced a $0.15 special dividend. The news shot its stock higher by over 3.50% as there have been many such as myself to ask for this dividend. Personally, I’d like to see a quarterly dividend, however this is a start and should allow the company’s board to see the impacts of a dividend on its stock. Spectrum remains one of the most shorted stocks in the market, with a short ratio of 30.80. However a dividend could allow the stock to trade higher, especially once shorts have to start paying longs to short their shares. Therefore, despite its payout being less than $9 million, the mere news of the dividend has already added nearly $25 million to the company’s market capitalization. This fact should be definitive proof to the company that investors want a dividend for their investment.
The announcements of special dividends and rises in yield are occurring on a daily basis as some companies look to return capital before the new-year and others are looking to instill long-term confidence. As the end of the year draws near, with less than three weeks remaining, it will be interesting to see which other companies join the party, and the end reaction to the stocks whose companies elected to return this capital.
BrianNichols is long SPPI. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!