It's been an exciting month for shareholders of investment publishing and management firm Value Line (NASDAQ:VALU). A little over a month ago, Value Line announced that it would pay a special dividend of $17.50 to shareholders, and since then, shares have been on quite a ride.
While the market may not always be efficient, in situations like this it is ruthlessly so. The day after the announcement, investors and speculators alike piled in to collect the booty, and the shares reflected this instantly. This week, with the dividend distributed, the party's over. The buyers quickly became sellers and, adjusted for the dividend, Value Line's shares sit almost exactly where they did before the announcement.
With the shares back to square one, perhaps a good question to ask is what made the company distribute such a large dividend in the first place? After all, Value Line had been a relatively pedestrian investment the last few years. The shares were fairly steady, as revenue, net income, and cash flow slowly contracted. However, even at lower levels of profitability, Value Line is still quite profitable, and cash continued to pile up on the balance sheet.
Upon closer inspection, two reasons for the special dividend stand out. The first is a reason that many companies have taken to. Dividends are being taxed at lower rates, making it difficult to justify not paying out idle cash. In fact, our very own Income Investor author, Mathew Emmert, has serenaded none other than Microsoft (NASDAQ:MSFT) and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) on this very subject. You can read all about it here and here.
The second reason is that four of Value Line's directors are also directors at Arnold Bernhard & Co., which holds 86% of Value Line's shares. Simply put, if the folks at Arnold Bernhard want some of Value Line's cash, they'll get it. While this may sound suspicious or unfair, it isn't. Value Line publicly announced the distribution, and those that hold the other 14% of the shares benefited in equal proportion to those that hold the majority. The dividend was also paid entirely from cash and investments, and Value Line should still have some of the green stuff left to pay the bills.
In comparison, investors should be wary of companies that take on debt to fund any flavor of dividends. Regal Entertainment (NYSE:RGC), which was highlighted in the May 24 edition of Forbes, is a perfect example of a company being saddled with debt to pay dividends to large shareholders.
With many companies paying the good old-fashioned, recurring type of dividends, I see little reason to chase the one-time payouts. Simply keep your eye on how a company funds its dividend payments and on its prospects.
Want to learn more about dividends? Sign up for a 30-day free trial of Motley Fool Income Investor.
Fool contributor Nathan Parmelee owns shares in Berkshire Hathaway, but none of the other companies mentioned.
