Why Generac Holdings Shares Charged Higher

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of generator and power products manufacturer Generac Holdings (Nasdaq: GNRC  ) charged higher by as much as 15% following the distribution of a special dividend to shareholders.

So what: In late May, Generac announced that it had replaced an older $575 million loan facility with $900 million of secured term loans at a lower interest rate. In accordance with the money the company will be saving in interest expenses, Generac chose to declare, at that time, a one-time special cash dividend of $6 per share. The dividend was to be funded by a mixture of cash on hand and debt and was paid out earlier this morning.

Now what: Special dividends are nice, but they aren't a reason to get too excited. The amount of the dividend is simply removed from a stock's share price and, as with a stock split, the sum of what you have is still the same. I'd rather Generac have declared a smaller quarterly dividend instead, which would have attracted income-seeking investors. Instead, Generac chose to finance the deal with debt, which is a questionable decision in my view. I like Generac's products and feel they border on being a necessary item, but today's move higher because of the special dividend seems a bit overdone.

Craving more input? Start by adding Generac Holdings to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On July 02, 2012, at 3:37 PM, dsagsdagfs wrote:

    Stock is probably up due to the bump in anticipated demand for generators following the extensive mid-atlantic area outages. Compare this bump with what happened following 2011's hurricanes and halloween storm - same thing.

  • Report this Comment On July 03, 2012, at 12:01 AM, asanr1247 wrote:

    This article makes some good points, such as, it would have been better to bump up a regular dividend instead of paying a special dividend, Generac has good, even necessary products, and they got a lower interest rate on their loans. But the conclusion that "today's move higher because of the special dividend seems a bit overdone" doesn't make sense. The special dividend was paid on Friday, June 30th and has nothing to do with the 15% gain today. It's all about the East Coast storms. Q2 earnings will get a small bump but Q3 earnings will be blow out earnings.

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