Did You Miss This 35% Dividend Yield?

On Sept. 12, a small, profitable tech company declared a monster $15-per-share special dividend. The yield – based on the company’s share price – exceeded 35%.
The size of the dividend piqued my interest, though dividend size alone is insufficient to secure an opportunity. A large special dividend must be supported by a company’s financial structure and a sound business outlook. The company that paid this 35%-yield special dividend had never paid a dividend – special or otherwise. But upon further analysis, I knew it could easily afford the payout. More important, I knew it was a proper use of funds.
This company is a global leader in digital modernization services. Over the years, it has grown and expanded its offerings to an array of managed IT services, including software application development, maintenance, digital modernization testing, IT infrastructure, and cloud migration.
Competition is surprisingly stark. International Business Machines (NYSE: IBM) and Accenture (NYSE: ACN) offer similar services, but these two behemoths focus on the Fortune 500. This company, in contrast, has carved out a niche serving smaller companies. Better yet, it practically owns its niche.
Growth has been especially impressive in recent years. Revenue posted at $996 million over the trailing 12 months, more than double the $419 million in revenue posted in 2009. Earnings per share (EPS) has grown to $3.13 from $1.43 over the same period.
As impressive as revenue and EPS growth have been, cash growth has been more impressive.

Too Much Cash

Free cash flow – cash left over after the bills are paid – maintains the same high-growth trajectory as revenue and earnings. The cash account has more than doubled over the past four years to over $1 billion. No one should be surprised when you consider that its net-income margin continually hovers above 25%: $100 in revenue produces $25 in net income.
So, we have an established tech company with a proven history of perpetual growth. Why, then, the special dividend? What value does it create for current and future shareholders?
Cash is a blessing, but too much of it is a curse. By returning excess cash, the company can maintain high returns on invested capital. What’s more, returning excess cash discourages “empire building,” which erodes shareholder value. (Microsoft (NASDAQ: MSFT) during the Steve Ballmer years retained too much and then squandered that cash on ill-conceived “empire-building” investments. Microsoft shareholders suffered through Ballmer’s follies for nearly a decade.)
The world is not your oyster. Each subsequent investment will likely produce lower returns than the previous investment. Smart management keeps only the cash it needs to fund higher-return investments. The rest is properly returned to shareholders. The $15-per-share special dividend was true to form. If the cash can’t be invested to generate a high return, then return it to its proper owners – the shareholders.
This $15-per-share payout was one special-dividend opportunity. I see more opportunities in 2017.

$2 Trillion in Overseas Cash

America’s largest multinational companies hold over $2 trillion in cash overseas: Apple (NASDAQ: AAPL), Microsoft, and General Electric (NYSE: GE) alone hold half-a-trillion dollars in overseas cash. These companies are champing at the bit to repatriate cash. And when that cash is repatriated, it can’t possibly be invested to generate the required rate of return that shareholders demand. Therefore, a significant percentage of this cash will be paid as high-yield special dividends.
The company that paid the 35% special dividend couldn’t wait. Its cash account had grown to an unmanageable size. The cash had to be moved off the books, so it bit the tax bullet and repatriated the cash.
Other companies – Apple, Microsoft, GE, and many more – continue to wait. They wait for the U.S. government to lower corporate income tax rate. They wait because U.S. corporate income tax rates are among the world’s highest.
They won’t have to wait much longer. A sea change in U.S. corporate tax rates should occur in 2017. Pressure builds on legislators to either lower corporate income tax rates or to enact a one-time repatriation income-tax holiday. Either course will lead to a flood of cash returning to the United States. A flood of cash will produce a wave of high-yield special-dividend payments.

Special Dividends: How to Identify the Right Opportunities

Unfortunately, not every special dividend is an investing opportunity. To be sure, many special dividends will enhance shareholder value: They will provide an immediate high-yield income and set the stage for high-return growth. Most, though, will provide an immediate high-yield income – equivalent to a sugar-junkie’s high – that will peter out after a few months.
On Thursday, Oct. 13, at 2 p.m. EDT, Ian Wyatt and I will host a free one-hour special-dividend teleforum. Our teleforum will reveal how to differentiate the special-dividend studs from the duds. Better yet, you’ll discover the high-yield, high-profit opportunities that special dividends offer. This is a can’t-miss teleforum for dividend investors.
So, get aboard and join us for this ground-breaking event. Simply click here to reserve your space. It’s only an hour, and it’s free. There’s nothing to lose, except the opportunity to invest in dividend stocks for income and profit like you never have before.

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