What happened
Shares of Tredegar Corporation (TG) rocketed more than 28% by 10:30 a.m. EST on Wednesday. Powering the industrial manufacturer's rally was its decision to pay a special dividend.
So what
Tredegar Corporation declared a special dividend of $200 million, or $5.97 per share. The distribution is payable on Dec. 18 to shareholders at the close of business on Dec. 11. The dividend is in addition to its regular quarterly dividend of $0.12 per share, which has the same record date but isn't payable until Jan. 1.
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The company is paying this special dividend because of its strong cash generation. It had $28 million in net cash at the end of the third quarter. That number further increased in October after the company closed the sale of its personal care business for $45 million to $50 million in estimated proceeds. Tredegar intends to use this cash along with borrowings under its credit facility to pay the special dividend. Due to low interest rates, the company feels it can prudently use some financial leverage while still preserving its available capital to fund its business' future needs.
Now what
Shares of Tredegar rallied nearly as much as the amount of the special dividend today. Because of that, there's no sense in buying the stock to capture the payout. Moreover, the company's decision to borrow money to fund some of the payment increases its risk. Given these factors, income investors might want to look elsewhere.