This Stock Offers a Hefty Special Dividend -- but There's a Catch

In October I talked about the shares of MSC Industrial , a North American distributor of metalworking and maintenance, repair and operations products and services. At the time, MSM offered a dividend yield of 4.2%. That offer reflected the then-share price near $72 and the annualized quarterly dividend of 75 cents per share the company instilled during summer. It marked the latest in a string of dividend increases at MSC Industrial over the last two decades. Since then, its shares drifted to a low near $70 and rebounded to just over $79 late in December before settling back down near the current share price. Even after that jockeying around, the yield on MSM shares is still an impressive 3.9%, well above the current yield of 1.85% offered by the S&P 500. That's a 30-basis-point move over the three months, so why am I coming back at you to discuss MSM shares and their dividend? Simple. The only thing I love more than a company that has an increasing dividend policy is when a company declares a hefty special dividend. I recently talked about two such cases, one with NortonLifeLock and with Park Aerospace . As it turns out, MSC Industrial also lands in that special dividend camp, as well. A few weeks ago the company announced it would pay a special dividend of $5 per share. At the current share price, the yield associated with that special dividend is roughly 6.5%, big enough to warrant getting some attention from dividend investors. For those interested in capturing that extra yield, MSC will pay that one-time extra dividend on Feb. 5 to shareholders of record on Jan. 22. Some will no doubt be tempted to take the special dividend and run, while others may be inclined to stick around and capture the yield associated with the company's regular dividend stream. To help with that decision, let's consider that the $5 per share special dividend will equate to a payment of $232.4 million. If we hoist upon that sum the $35 million associated with the payment of the next regular dividend of 75 cents per share that will also hit on those same deadlines, some quick arithmetic shows MSC will have to payout a total of $267.4 million in the next few weeks. When the company reported its November quarter results earlier this month, it had all of $27.8 million in cash and equivalents on its books. This more than means the company will have to tap into its credit facilities to execute those payments. MSC has a $600 million committed credit facility and entered into six unsecured credit facilities that are uncommitted, totaling $440 million, according to its recent filing with the Securities and Exchange Commission. The same SEC filing reveals that during the first quarter of fiscal 2020, the company extended, and in some cases amended, five of the Uncommitted totaling $410 million of maximum uncommitted availability. Finally digging into the notes contained inside the form, known as the 10-Q, we find that exiting November, the company had $117 million outstanding under its uncommitted facilities. The bottom line is that while shareholders will enjoy a nice dividend treat, MSC Industrial is borrowing to make that happen. This is not the way I would prefer to see this occur. Granted, the company will have ample borrowing capacity left under its various credit facilities, but the borrowed capital to fund the dividend is going to come at the expense of earnings per share, depending on how fast the borrowings are repaid. In this case, investors may want to pick up the forthcoming MSM special dividend, but they should keep tabs on the industrial economy. If it begins to roll over, it could mean MSC Industrial has to borrow more to meet future dividend expectations.

This Stock Offers a Hefty Special Dividend -- but There's a Catch

For shareholders of record as of Jan. 22, MSC Industrial will make the big payout next month, but it will do so on borrowed cash.

Columnist Conversation

MU After the Mini Crash...Next Decision

AMZN Weekly Decision

AMD and MU Zones Violated w/o Trigger

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.