The dividend yield, as reported by the major financial portals, would go unnoticed by most income investors, and rightly so. A $0.40-per-share annual dividend on shares trading at $40 produces a 1% dividend yield. Why bother?
I’m glad I bothered, because the actual dividend yield ̶ the unreported dividend yield ̶ was closer to 20% than it was to 1%.
Mueller Industries (NYSE: MLI), a manufacturer of metal and plastic tubes, pipes, fittings, and valves, declared a $8-per-share-special dividend on Jan. 25. The special dividend alone lifted the yield on Mueller’s shares to 19.9%.
And yet few noticed. The few financial portals that bothered to report the special reported a $3-per-share special dividend and a 7.4% yield ̶ a respectable, though hardly exceptional, yield.
The composition of the Mueller special dividend flummoxed the financial portals. The special dividend was composed of $8 of assets ̶ $3 of cash and $5 in principal amount of a debenture. The financial portals missed the $5 of debenture value.
The financial portals were further flummoxed by the investors’ rights. Not every Mueller investor was entitled to the debenture; not every investor owned the requisite number of shares. Here’s what I mean.
Mueller issued the debentures in $1,000 denominations and multiples thereof. Investors would not receive a $5 debenture for each share owned. They would receive a $1,000 debenture and multiples of $1,000 debentures based on the number of shares owned.
For example, if an investor owned 200 Mueller shares, he’d receive $600 in cash ($3 per share) and a $1,000 debenture. The debenture was based on the number of shares, 200, and $3 per share of cash. The debenture’s value per share is $5. So, 200 times $5 equals $1,000, the denomination of one Mueller debenture.
Because the debentures were issued only in $1,000 denominations and increments thereof, investors were paid cash in lieu of the fractional debentures. If an investor owned 100 Mueller shares, he’d be entitled to $300 in cash plus an additional $500 (100 times $5) of asset value. Because $500 is less than $1,000, Mueller wouldn’t issue a debenture. Instead, Mueller would send $500 of additional cash.
Confusing? It really isn’t, but some deciphering is required; hence, the major financial portals overlooking the debenture and underreporting the actual dividend and dividend yield.
Mueller Special Dividend Creates Shareholder Value
Was Mueller’s complex special dividend worth collecting? I thought so. The debenture, if received, was a good long-term income investment. It will pay 6% interest annually, with payments delivered in semi-annual installments. And if an investor preferred cash to debenture? He could sell the debenture on the over-the-counter market.
Just as important, I saw the Mueller special dividend creating shareholder value. The additional income was an obvious draw, but it was a draw only if it appeared to perpetuate future value.
Mueller was well-capitalized, and likely excessively capitalized, when it declared its special dividend. The cash account stood at $351 million at the end of the fourth quarter. The cash portion of the special dividend lowered the cash account by $172 million. The debenture portion of the special dividend means Mueller will pay $17.2 million annually to shareholders as interest and then $287 million in 2027 to retire the debentures.
Removing excess cash mitigates empire building. Concurrently, it ensures returns on investment capital remain high.
But even sans the special dividend, Mueller merited a look. The company has 100-year history, which means it has endured numerous business cycles. Better yet, it’s a solid play on the ongoing expansion of non-residential construction and the still-modest recovery in residential construction.
Unfortunately, most income investors missed the opportunity to collect the Mueller special dividend; they never knew it existed. And if they knew it existed, they likely underestimated the amount and the yield.
Most income investors missed the opportunity, but not all. I didn’t miss Mueller’s high-yield special dividend, neither did the income investors who I notified. They were able buy Mueller shares and collect the high-yield special dividend.
If you’re interested in collecting (and never missing) a high-yield special dividend like Mueller’s, join Ian Wyatt and me on Tuesday, May 2. We’re hosting a free live event to show you how to collect big special dividends to capture big yield that delivers big total return.