5 Special Dividends Worth Considering

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The “Fiscal Cliff” has individuals and companies frightened. As a result, many companies are moving to pay a “special dividend” to help shareholders, especially major shareholders, avoid possible tax rate increases on dividend income that could skyrocket from the current maximum of 15% to as much as 40%. A diminished balance sheet after paying special dividends combined with a higher tax environment could compel companies to throttle back on future dividend increases hampering long term gains in a post fiscal cliff environment. Below are five companies paying a special dividend worth considering.

Buckle

Buckle (NYSE: BKE), a retailer of apparel, footwear and accessories, recently announced a $4.50 per share dividend payable on Dec. 21 for shareholders of record on Dec. 7. The special dividend combined with the $0.80 normal dividend equates to an 11% dividend yield for 2012!

Buckle can support this dividend with $245 million in cash and short term investments which make up 55% of stockholder’s equity. The normal and special dividends will deplete this balance by $224 million leaving about $21 million or 5% of stockholder’s equity.

Buckle’s Chairman Daniel Hirschfeld and CEO Dennis H. Nelson own 34% and 6% of the company respectively. This means payment of the special dividend will prove advantageous for them personally especially if the dividend tax rate increases later. The fact that these two senior managers own significant stakes will insure strong stewardship of shareholder interests at large including the replacement of the cash paid out.

Sturm, Ruger

Firearms manufacturer Sturm, Ruger (NYSE: RGR) also announced a $4.50 per share dividend payable on Dec. 21 for shareholders of record on Dec. 7. This equates to a yield of 10% when combined with the regular dividend as of this writing for 2012.

Sturm, Ruger’s balance sheet strength exceeds even Buckle’s with cash and short term investments of $105 million making up 60% of stockholder’s equity. Payment of the special dividend will deplete that balance by $89 million leaving about $16 million or 9% of stockholder’s equity.

Chief Executive Michael O. Fifer owns roughly 253,000 shares or 1.3% of the company according to the latest proxy which means a pre-fiscal cliff dividend payment will benefit his tax liability, representing another example of management’s alignment of interests with shareholders.

Sturm, Ruger’s growth comes from fears of gun control and product innovation. The gun control fears, like all fears, may subside, but new products will fuel future cash flow growth for Sturm, Ruger replenishing its balance sheet.

Costco

Wholesale club retailer Costco (NASDAQ: COST) announced a $7.00 per share dividend for shareholders of record on Dec. 10 payable on Dec. 18 equating to an 8% total yield for 2012 as of this writing.

Costco possesses nearly $5 billion in cash and investments or 39% of stockholder’s equity. The $3 billion special dividend payout will still leave the company with a cash and short term investment balance equal to 15% of stockholder’s equity.

Jim Sinegal, the former Chief Executive, owns 2.3 million shares indicating he really stands to benefit from a tax break on dividends.

Costco has many positive attributes to help sustain cash flow growth. It pays employees an above average wage which insures the alignment of workers’ interests with management and shareholders. Costco prides itself on keeping other costs low and selling the right merchandise at the right price.

Lancaster Colony

Specialty food, candle and glassware maker Lancaster Colony (NASDAQ: LANC) announced a $5.00 per share special dividend for shareholders of record on Dec. 10 payable on Dec. 28 equating to a yield of 8.7% when combined with the normal dividend.

Lancaster Colony’s $193 million cash stash represents 33% of stockholder’s equity. The $146 million payout in dividends will reduce that to 8%.

Again, management owns a significant stake in this company. Chief Executive John Gerlach, Jr. and board member Robert L. Fox own 30% and 4% respectively. These two powerful owners probably provided the motivation for the special dividend to lower their own tax burden. They will also provide superior stewardship for the company going forward since a significant portion of their wealth resides in the company.

Insperity

Insperity (NYSE: NSP), a human resource solutions company, announced a special dividend of $1.00 per share for shareholders of record on Dec. 7 payable on Dec. 21. The special dividend combined with the regular dividend of $0.68 per share equates to a 6% yield for 2012.

The $253 million in cash and marketable securities on Insperity’s balance sheet represents 97% of stockholder’s equity. The $1.00 per share in special dividends adds up to a $30 million payout. Even after the payout, cash and marketable securities will still equal 86% of stockholder’s equity. Factor in the $50 million stock repurchase program and you still have 66%.

As with the rest of the companies discussed, management owns a huge stake in Insperity meaning their interests and that of other shareholders are aligned.

The need for human resource management will increase as the complexity of the law surrounding personnel increases fueling future cash flow growth and the replenishment of cash on the balance sheet. The passage of Obamacare and confusion from the fiscal cliff represents perfect examples.

Conclusion

Three themes make these companies worth considering. These companies sit on a huge pile of cash making the special dividend possible. They sell needed products or services ensuring future sustainability of cash flow. Finally, they have management with a significant ownership stake in the business aligning their interests with other shareholders. If we do fall off the fiscal cliff and dividend income tax rates rise then management will leave the dividend alone, decrease the future rate of dividend increases or abolish the dividend. Buying these companies may represent the best chance to maximize long term investment gains for some time to come.


stockdissector has no positions in the stocks mentioned above. The Motley Fool owns shares of The Buckle and Costco Wholesale. Motley Fool newsletter services recommend The Buckle and Costco Wholesale. 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!

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