The most exciting news about large, one-time dividends is that they happen with surprising regularity.
According to my research, they are most common in the second half of the year.
In an average month, there are 12 special payments. Yet only one or two of these dividends fit our strict investment criteria.
Namely, we look for cash-rich companies that are returning money to shareholders for the right reasons. It’s not always as easy to spot those reasons, however.
Case in point: American food company Pilgrim’s Pride (NASDAQ: PPC) announced an 11.7% one-time dividend on April 27. This large dividend is on the heels of an increased cash hoard following impressive first-quarter results.
Year over year, Pilgrim’s Pride cash rose 30%. A huge cash hoard is one of the hallmarks of a company that’s preparing for a huge one-day payout.
And as we’ve seen, following the dividend announcement, shares of Pilgrim’s Pride soared. In fact it’s jumped 15% in the past two weeks.
That might seem backwards … after all, if a company is about to unload a huge chunk of cash, it doesn’t seem logical that the stock price would rise.
But the market is a strange place, and while a one-time payout of cash might be significant from a day-to-day balance sheet standpoint, the market is much more appreciative of companies that reward shareholders.
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In a powerful way, a strong dividend policy signals to the market that a company values shareholders in a very lucrative and straightforward way.
So why aren’t we buying Pilgrim’s Pride and collecting this 11.7% dividend?
At first glance, it seems like the perfect set up. Its cash balance is obviously strong … and while it’s likely this will end up being a profitable company to own over the long run. Yet this specific one-time payout didn’t meet our strict criteria.
First, the company’s latest earnings report revealed some big problems. While it’s true that Pilgrim’s Pride did beat earnings expectations … the actual sales and earnings declined over the last year. This kind of monkeying around with expectations is tiresome. If a company does worse than it did last year, is that a good thing? In my mind, it’s certainly not a reason to pay a special dividend.
And secondly, and most importantly, the company’s debt level has been steadily rising over the past few years. That’s not unusual – many companies have been taking advantage of low interest rates.
But debt is what got Pilgrim’s Pride in trouble back in 2008. That’s when the company filed for bankruptcy, when it had debt levels of $1.9 billion. Today, Pilgrim’s Pride has debt of just over $1 billion, up from $300 million in 2013.
Incidentally, the company also blamed high chicken feed prices for its troubles, and with oil prices on the rise, it’s likely that feed prices will rise as well.
Perhaps the most important red flag is this: the company is paying a special dividend made possible by adding debt to the balance sheet.
Remember that just seven years ago, Pilgrim’s went bankrupt. Yet today, the company is paying out a large special dividend on the heels of growing its debt load?
This may prove to be a recipe for failure. I’d love to collect an 11.7% cash payout … but not if the company might go belly up within the next year or two.
This dividend strategy only works if you can exercise patience – and wait for the right companies to issue one-time large dividends.
If you rush into something without really kicking the tires, you’ll set yourself up for failure.
That’s why we’re not pulling the trigger on Pilgrim’s Pride.
But don’t worry about letting this one pass by. Our research shows there will be plenty of exciting situations to collect one-time payouts in 2016 … especially as the presidential race continues to ramp up.
Next week, we’ll discuss some of the biggest companies that are holding onto their cash. Plus, we’ll explain why we think these stocks could be on the verge of massive one-day payouts later this year.
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