Special Dividends: A Wish List

A combination of cash-rich corporate balance sheets, extremely low borrowing rates, and potential dividend tax hikes have companies shelling out special dividends as 2012 draws to a close. I've compiled my own list of companies that I'd like to see pay special dividends.

But before I reveal my wish list, let's first take a look at why so many companies are paying special dividends this year.

Tick-tock
According to Bloomberg, from late September to mid-November, 59 companies in the Russell 3000 index paid special dividends. That's compared to just 15 companies that did so last year. Many companies are paying special dividends by year-end to save shareholders a potential tax hit. Unless Congress averts the fiscal cliff, taxes on investment income will increase substantially next year.  

So far, for a variety of reasons, companies have chosen to fund these special dividends mostly by taking on debt instead of using balance sheet cash. But I wanted to take a look at some companies that are well positioned to pay a special dividend, regardless of how they fund it.

A wish list
All five of the following companies have the ability to pay a special dividend. These companies boast cash-heavy balance sheets and little long-term debt, and already pay dividends at sustainable payout ratios. A payout ratio is the percent of company earnings paid to shareholders in the form of dividends. A low dividend payout ratio means the company has more room to increase its dividend in the future.

Here are the five companies on my special dividend wish list.

Source: Yahoo! Finance. 

All five of these companies already pay shareholders at least a 1% annual dividend, and they also boast modest dividend payout ratios. Most notably, the lower-dividend-paying agricultural company Mosaic and apparel company Ralph Lauren have the most room to pay more dividends. Ralph Lauren recently announced that it'll pay its fourth-quarter dividend before year-end, but it's yet to announce a special dividend.

Medical equipment maker Stryker has paid its dividend for 20 years and possesses a modest dividend payout ratio of 23%. Shares have been under pressure this year ahead of Obamacare's 2.3% excise tax on medical equipment that'll go into effect in January 2013. Any easing of the tax may boost Stryker shares.

These five companies each possess comfortable cash positions in relation to their respective market caps, most especially Marvell Technology. Forty-four percent of the value of its market cap is held in balance sheet cash. Marvell Technology and Garmin possess no long-term debt on their balance sheets.

With its large cash position, Garmin can afford to pay a bit of its cash back to shareholders before year-end. The company pays a generous regular dividend of 4.3%, but its payout ratio of 57% could prevent it from paying out more. This reduces the chances that it'll announce a one-time dividend payment.

Of these five companies, I think Marvell Technology is the most likely candidate for declaring a special dividend. It has an average dividend yield of 2.7% and a modest dividend payout ratio of 21%. Marvell's large cash position alone makes it a very strong candidate, as it has money on-hand to pay a dividend without having to borrow to do so. Moreover, as I explain below, its 27% insider ownership makes the likelihood of it declaring a special dividend even higher, as does billionaire David Einhorn's substantially increased holding of the stock, which now makes up nearly 5% of his Greenlight Capital hedge fund. 

Marvell Technology's major shareholders stand to potentially save millions of tax dollars from a special dividend payout before year-end. Insiders own a great portion of Stryker's and Garmin's outstanding shares as well -- roughly 20% and a massive 52% of shares, respectively. By comparison, insiders own less than 1% of outstanding shares of both Ralph Lauren and Mosaic.  

Foolish bottom line
None of these companies have announced a special dividend, but all five of them are in a great financial position to do so. Have a company on your special dividend wish list? Feel free to let me know in the comments section below.