QUALIPORT
Shares Paying Special Dividends

By Maynard Paton (TMFMayn)
April 1, 2004

A company distributing a special dividend is always worth further investigation. The theory is simple: the firm would appear to enjoy excess cash in the bank and is run by management not tempted by grandiose or aggressive (i.e. risky and costly) expansion schemes.

Similar to share buybacks, special dividends may seem unimaginative and boring to some investors and directors, but unimaginative and boring traditionally make for a good long-term investment. Listed companies almost always announce a special dividend within a set of interim or preliminary results, and the distribution process is the same as the ordinary dividend equivalent. Read more.

Watch list specials

Three members of the Qualiport's watch list have declared special dividends over the past ten years:

Company	Market value (£m)	Share price (p)	Full-year ordinary dividend (p)	Year	Special dividend (p)
DFS Furniture (LSE: DFS)	463	431	24	2002	14.1
				2000	20
				1999	10
				1996	10
				1995	10
Rotork (LSE: ROR)	330	385	14.75	2004	5.85
Ulster Television (LSE: UTV)	225	428	10	1999	35
				1996	20

DFS Furniture is a textbook example of special dividends in action. As well as lifting the ordinary dividend every year since its 1993 flotation, the sofa retailer has also made five special payments. As Qualiport followers will know, DFS is extremely cash generative and the growing cash hoard has sensibly been returned to investors over the years.

Even so, DFS still has a large amount of net cash on its balance sheet, as does Rotork. The actuator company announced a special dividend last week, though cautioned it 'would like to move toward a stronger level of dividend cover over time'. Long-time Rotork shareholders won't be too concerned; their ordinary dividend has been lifted in all but one year out of the previous thirty.

Ulster Television, however, is a different kettle of fish. A change in management and strategy in late 1999 curtailed further special dividends, with excess cash then earmarked for shareholders subsequently diverted into acquisitions.

Corporate activity

Investor must be aware that special dividends aren't always funded by a surplus of cash built up from ongoing operations. Corporate events often prompt a one-off payout:

Disposals: Companies disposing of assets may wish to pass on any windfall to shareholders. For example, construction firm Carillion (LSE: CLLN) announced a 1.7p per share special dividend in its results earlier this month. The company is selling off certain equity stakes and investments, which interestingly, are expected to fund future special payments.

Restructures: A financial re-jig can sometimes generate excess cash. For instance, pub group Mitchells & Butlers (LSE: MAB) completed a securitisation programme last year, which released an additional 68p per share to investors.

Mergers and acquisitions: Companies acquired or involved in mergers frequently announce a special dividend to sweeten the deal for shareholders. Milk outfit Express Dairies declared a 9.6p per share special payout prior to its merger with Arla Foods (LSE: ARU) last year, while security products business Blick announced a 6p one-off handout prior to its 2003 takeover.

Special contenders

As well as the three on the watch list, these four companies also have a record of paying special dividends:

Company	Market value (£m)	Share price (p)	Full-year ordinary dividend (p)	Year	Special dividend (p)
T Clarke (LSE: CTO)	71	551	27	2003	10
				2001	10
				1999	12.2
				1997	17
Liontrust Asset Management (LSE: LIO)	148	423	4	2003	8.25
				2002	4.5
Manchester United (LSE: MNU)	632	241	2.5	2003	1.5
				2002	1
Quayle Munro (LSE: QYM)	20	540	16.5	2004	50
				2002	25
				2001	50

T Clarke, an electrical contractor, is one of the few shares that have sustained tenbagger status over the past decade. The company paid out a 6.55p dividend in 1991, hit trouble soon afterwards, but recovered over time to distribute a 27p full-year payout for 2003. Backing up the prospect of more special dividends is net cash of around £10m (nearly 100p per share) in the last accounts. (Order T Clarke annual report.)

Though Liontrust only gained a listing in 1999 and commenced ordinary dividend payments in 2001, the fund manager has since been able to make two chunky special payouts. However, Liontrust's handouts are financed by performance-related profits, which vary from year to year. With funds under management almost doubling in the past twelve months, perhaps another special dividend isn't far away.

The football sector is hardly renowned for its reliable profits, let alone dividends and one-off payouts. And although Man Utd is the undoubtedly the industry leader (in financial terms), it's still quite astonishing to realise the club has been able to declare two special dividends in recent years. Recent results revealed £24m (or 9p) of net cash in the bank and an interim payout up 87%.

Quayle Munro is an obscure corporate finance company with an eclectic portfolio of investments. Notably, the bear market appears not to have affected Quayle's performance, with three substantial special dividends witnessed in the past four years. Furthermore, the group's ordinary payouts have jumped from 6p to 16.5p a share since 1993. (Order Quayle Munro annual report.)

Beware

No company should be deemed 'buy and hold quality' solely on its special dividends. However, the payments could well indicate the existence of some sort of operational superiority and are thus good prompts for further research. Beware, though, that special dividends do not always produce happy shareholders. Evidence comes from two blue chip disappointers: Royal & SunAlliance (LSE: RSA) announced the equivalent of a 39p per share special dividend in March 1999, since when its shares have fallen from 474p to 84p. Cable & Wireless (LSE: CW.) declared an 11.5p special dividend in November 2001, after which the shares reversed from 347p to 130p.

Where next? Fool's Guide To Dividends | Share Buybacks

The author owns shares in DFS Furniture.