Hoping for More Special Dividends

 | Dec 06, 2012 | 2:30 PM EST
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December has been a popular month for acquisitions but also the payment of special dividends. With the real possibility of dividend tax rates jumping significantly in 2013, many aren't taking any chances with respect to future tax rates. In some cases such as Wal-Mart (WMT), the regular quarterly dividend payment date has been moved up to December from January to avoid the higher tax rate. Just last week Costco (COST) announced a special $7 per share special dividend. I suspect before the year is out another batch of special dividend payments may be made.

A few weeks ago, I suggested investors take a closer look at retailer Stein Mart (SMRT) and online pet pharmaceutical company PetMed Express (PETS) due to their depressed share prices coupled with their cash rich balance sheets. PetMeds was trading for less than $11 a share with over $3 per share in net cash. They recently announced a $1 per share special dividend. The stock now trades for $12.25. I was even more bullish on Stein Mart because it stands out to me as a high quality discount retailer. I've seen shirts at Stein Mart that sell for a fraction of what Bloomingdale's charges. The balance sheet is pretty as well with no debt and over $2 per share in net cash. Insiders own nearly 40% and Stein Mart has a history of paying out special dividends to shareholders -- not a surprise with such high insider ownership. Last week, Stein Mart also announced a $1 per share special dividend when the stock was trading for around $7.50. The shares now trade around $8.35, which is still a good price for a quality retailer serving a growing consumer desire for discounted fashion.

With 2012 quickly coming to an end, the window for special dividend payments is quickly coming to an end. But there are some names that certainly have the set up to do so. One in particular is Value Line (VALU). Interestingly enough, Value Line already yields close to 5%. Such a high yield on common equity can often signal a concern about the dividend stability. Yet with approximately $1.50 in cash per share, Value Line is debt free. Perhaps it will deliver an early Christmas bonus to shareholders.

Perhaps Google (GOOG) will adhere to its "Don't be evil" motto and show some kindness to its shareholders seeing as how the company sits on over $100 per share in net cash. I realize there is a huge tech war between Google, Apple (AAPL) and Microsoft (MSFT), but, frankly, all three of those businesses have more cash than they could possibly reinvest at attractive returns on capital. More so, they continue to generate tons of free cash flow each quarter so any cash payments would quickly be regenerated in a few short months.

With nearly $3 in net cash per share, perhaps Sterling Construction (STRL) will give a little back to its shareholders who have suffered a year to date loss of nearly 22%. GSI Technology (GSIT) is a $150 million market cap semiconductor company that makes memory products for the telecommunications industry. The shares trade for $5.70 and come with $2.50 of cash an no debt. Tellabs (TLAB) is a $1.2 billion juggernaut sitting on over $800 million in net cash on the balance sheet. The shares trade for $3.75 and net cash per share is approximately $2.20. Tellabs shares are down 18%, year-to-date, and the company currently yields 2.4%. An accelerated dividend payout or a special dividend would be very significant for Tellabs.

A pile of cash is certainly no guarantee that a company will return that cash to shareholders. However, unless a company has a way to reinvest its cash an earn an attractive return on invested capital, then serious consideration should be given to returning that cash to shareholders. With a real possibility that dividend tax rates will increase in 2013, cash-rich companies owe it to shareholders to consider returning some of it back.

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