QUALIPORT
Shares Paying Special Dividends

By Maynard Paton (TMFMayn)
August 15, 2005

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 to be 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	Year	Special dividend (p)	Full-year ordinary dividend (p)
London Stock Exchange (LSE: LSE)	2004	55	4.8
Rotork (LSE: ROR)	2004	5.85	14.75
Ulster Television (LSE: UTV)	1999	35	6.3
	1996	20	4.5

All three companies paid their special dividends following a build-up of surplus cash from operations.

The London Stock Exchange finally decided in 2004 what to do with its burgeoning cash pile (then worth £223m): return £162m of it to shareholders. Read more.

Another to provide a one-off hand back last year was Rotork, though the sum was somewhat smaller than the LSE's at £5m. (Long-time shareholders of the actuator company have seen their ordinary dividend lifted in all but one year out of the previous thirty!)

Sadly, a change in management and strategy in late 1999 curtailed further special dividends at Ulster Television, with excess cash earmarked for shareholders in 2000 subsequently diverted into acquisitions.

Specials in 2005

Following decent operating performances, these six shares have each declared special dividends in 2005:

Company	Special dividend (p)	Full-year ordinary dividend (p)
Admiral (LSE: ADM)	6.2	3.1
De La Rue (LSE: DLAR)	42.2	17.0
3i (LSE: III)	43.2	15.5
Millennium & Copthorne (LSE: MLC)	6.25	6.25
Northern Recruitment (LSE: NRG)	11.5	7.5
Savills (LSE: SVS)	20	18.5

Of the six on the list, Admiral seems the most likely to ever meet Qualiport status. Yes, it is an insurer, and yes, this portfolio has been troubled by an insurer in the past. But a cursory inspection of Admiral's full-year result statement shows consistent and fast growing underwriting profits since at least 2000. In fact, Admiral got its stock-market record off to a very good start. The company only obtained a quote in September 2004 and declared its first special just six months later!

Investors, however, should note special dividends aren't always funded by a surplus of cash built up from operations. For example, disposals often prompt a one-off payout. The following six shares have all declared a 2005 special dividend following the sale of assets, investments or subsidiaries:

Company	Special dividend (p)	Full-year ordinary dividend (p)
De Vere (LSE: DVR)	159	13.1
Oxford Instruments (LSE: OXIG)	25	8.4
Stanley Leisure (LSE: SLY)	250	10.5
United Business Media (LSE: UBM)	89	12.0
Viridian (LSE: VRD)	81	40
Whitbread (LSE: WTB)	135	25.3

In addition, special dividends are also used to sweeten shareholders during merger and acquisition activity. Food firm Geest (LSE: GET), for instance, declared a 7p special dividend when it agreed to a £485m bid from Icelandic group Bakkavor earlier this year. Other special dividends prompted by corporate get-togethers in 2005 have emanated from stockbroker Rensburg Sheppards (LSE: RBG) and media firm Incepta (LSE: ITA).

(Note: Special dividends can also be funded by, er, special dividends. Stockbroker WH Ireland (LSE: WHI) declared a 2p per share one-off payout earlier this year... funded entirely by the special dividend the company received from its stake in the London Stock Exchange!)

Beware

No company should be deemed worthy of a purchase solely on its special dividend. However, the payments could well indicate the existence of some sort of superior cash generation and/or conservative management and are thus good starting points for further research.

Beware, though, that special dividends do not always produce happy long-term 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 93p. Cable & Wireless (LSE: CW.) declared an 11.5p special dividend in November 2001, after which the shares reversed from 347p to 163p.

Maynard owns shares in London Stock Exchange.

Portfolio value

Holding	Number of shares	Closing price 15/08/05 (p)	Value (£)
Associated British Ports	681	460.25	3,134.30
Emap	372	828	3,080.16
Halma	1,920	147.25	2,827.20
Johnston Press	1,608	499.75	8,035.98
London Stock Exchange	2,018	578	11,664.04
Cash			509.14
Total			29,250.82