A 28.6% Dividend Yield? Yes, It’s Possible

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Time flies. The one-year anniversary is here: Leidos Holdings (NYSE: LDOS), a large government technology contractor, declared an extraordinary dividend last August. The Leidos dividend was $13.64 on a $48 stock.
Leidos’ dividend generated a 28.6% yield.
Leidos’ extraordinary dividend flew by income investors unnoticed. Most of the major financial websites failed to pick up the declaration. They continued to list the Leidos quarterly dividend at $0.32 per share and the dividend yield at 2.6%.
A 2.6% dividend yield is respectable, though it hardly stokes passions. But if you knew the dividend yielded closer to 30% than 3%, your interest would at least be piqued.
Mine was.
The Leidos dividend was big, to belabor the obvious. It would offer an income windfall to investors. But would it add or subtract to value down the road? I needed the answer before I could pass judgment.

The Leidos Dividend and Timing

Leidos declared its extraordinary dividend around the same time it would add considerable girth. Leidos would combine its business with Lockheed Martin’s (NYSE: LMT) realigned Information Systems & Global Solutions (IS&GS) business.
It all rang familiar. When I first caught wind of the Leidos-Lockheed merger, the Kraft Foods and H. J. Heinz merger 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 was true of Leidos and Lockheed: Solid businesses, but the value proposition resided in elevating operational efficiency.
Kraft investors received an extraordinary dividend. They would receive $16.50 per-share upon completion of the Heinz merger.
The new Kraft Heinz (NASDAQ: KHC) emerged in June 2015. Kraft investors received their large dividend and shares in the new Kraft Heinz. Kraft shares had traded near $90 before the dividend. The new Kraft Heinz opened trading at $71 after the extraordinary dividend was paid.
Over the subsequent year, efficiency emerged. Kraft Heinz’ operating margin expanded by 400 basis points. Kraft Heinz shares traded near $90 again. The shares regained all the lost value of the dividend payment for the Kraft investors.
History, as Mark Twain, said, never repeats, but it does rhyme.
My analysis suggested the Leidos- Lockheed merger could replicate Kraft Heinz. I recommended investors buy Leidos shares. Those who did could buy  Leidos shares at $48 and realize a 28.6% dividend yield.
Leidos shares traded ex-dividend on August 17. The share price was adjusted lower by the $13.64 dividend. Then we had to wait and recapture the adjustment through expected share-price appreciation.
The expected happened. Leidos shares were trading above $48 by mid-November. The 28.6% dividend yield was locked in. Investors recorded a 28.6% return in three months.

Immediate High-Yield Income

The right large dividends (like Leidos) offer immediate high-yield income. They set the stage for future share-price appreciation.
But the “right” large dividends are the exception, not the rule. Most large dividends provide immediate high-yield income. Too often, though, the stock soon fades like a sugar junkie’s high.
Never suffer a sugar junkie’s high.
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