A 2.6% dividend yield is respectable, though it hardly stokes income-investor interest. But if you knew that Leidos Holdings paid a dividend closer to 30% than 3%, your interest would at least be piqued.
Unbeknownst to most investors, Leidos Holdings declared a $13.64 per-share special dividend after the market close on Thursday, Aug. 4. The dividend produced a yield close to 30% on the closing market price.
I say unbeknownst to most, but not to all. I notified Dividend Confidential subscribers of Leidos Holdings’ high-yield special dividend within hours after it was declared. My notification enabled subscribers to buy Leidos Holdings and collect its $13.64 per-share special dividend and lock in a 28.6% dividend yield.
The special dividend was worth collecting and the high yield was worth locking in.
Leidos Holdings is an applied technology company focused on cybersecurity, systems engineering, large-scale agile software development, and data analytics. U.S. government contracts accounted for 76% of Leidos Holdings’ $5.1 billion in 2015 annual revenue.
Leidos Holdings and Lockheed
Around the time the special dividend was declared, Leidos Holdings announced that it would add considerable revenue girth. It would combine its business with Lockheed Martin’s (NYSE: LMT) realigned Information Systems & Global Solutions (IS&GS) business.
I liked the tie-in with Lockheed Martin, a master at procuring government contracts. I also liked that the new combination balanced Leidos Holdings business portfolio. Under the combination, 2016 revenue will climb to $10 billion.
That said, size for the sake of size is never enough. If size fails to increase profitability, then what’s the point? Revenue growth without earnings growth is simply empire building. Earnings growth should tag along, and Leidos Holdings earnings will tag along. Management expects EPS to post between $3.15 and $3.35 in 2016. Previous guidance – pre-Lockheed – called for EPS to post between $2.85 and $3.05.
When I first caught wind of the Leidos Holdings-Lockheed Martin IS&GS merger, the Kraft Foods and H. J. Heinz merger that occurred last year sprang to mind.
Kraft and Heinz were two stable, predictable businesses. But they were hardly growth businesses. (We are talking 1970s staple foods, after all – Velveeta cheese and Heinz ketchup.) The same is true of Leidos Holdings and IS&GS. Solid businesses, but the value proposition resides in eliminating redundancies and elevating operational efficiency.
The new Kraft Heinz Co. (NASDAQ: KHC) emerged in June 2015. Over the past year, Kraft Heinz’s operating margin has expanded by 400 basis points; gross and net margins have expanded as well. Kraft Heinz is performing operationally better as a duo than as solo acts.
The position that Kraft investors found themselves in last year was similar to the position Leidos Holdings investors found themselves in this past August.
Kraft investors received a $16.50 per-share special dividend post-merger. The special dividend was less than Leidos Holdings’ special dividend as a percentage of the share price, but it was big enough. Kraft Food shares closed their last days of trading around $89. Kraft investors received their dividend and shares in the new Kraft Heinz, which opened trading on June 6, 2015 at $71. In a little over a year, Kraft Heinz shares were again trading at $89.
Locking in a Hefty Return
History, as Mark Twain, said, never repeats, but it does rhyme. When I recommended Leidos Holdings to Dividend Confidential readers, they were able to buy Leidos Holdings at $48. Today, the shares trade above $49. Leidos Holdings investors collected the $13.64 and saw their share price recover to pre-special-dividend levels.
In short, Leidos Holdings investors were able to lock in a 29.2% total return in just over three months.
The right special dividends offer immediate high-yield income while setting the stage for future high-return growth. But the “right” special dividends are the exception, not the rule. Most special dividends provide an immediate high-yield income but at the expense of future growth and shareholder value.
On Thursday, Dec. 1, Ian Wyatt and I will host a free special-dividend teleforum at 2 p.m. EST. During the teleforum, you’ll discover the high-yield, high-profit opportunities the right special dividends offer. This is a can’t-miss event for dividend investors. You have nothing to lose except the opportunity to invest for income and profit in dividend-paying stocks as you never have before. Click here to reserve your space today.