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 retailer Stein Mart (NASDAQ:SMRT) were up around 12% by noon on Thursday after announcing a massive $5-per-share special dividend Wednesday evening.
So what: Stein Mart has a history of paying special dividends in addition to its regular quarterly dividend. The last one came in late 2012, but that was only for $1 per share. Stein Mart stock currently trades at around $16 per share, putting the $5-per-share special dividend at nearly a third of the company's market capitalization.
Stein Mart doesn't have enough cash on hand to pay for this dividend, which will total about $230 million. The company's latest balance sheet shows just $65 million in cash. The company plans to finance the special dividend through a new credit facility, and going forward, Stein Mart expects its total debt load to fluctuate between $150 million and $200 million. Stein Mart currently has no debt.
Now what: The size and the way that Stein Mart is paying for this special dividend is notable. Special dividends are a way to return cash to shareholders without committing to a larger quarterly payment, but taking on so much debt in order to do it seems like a questionable move. This debt will wipe out nearly all of Stein Mart's shareholders' equity, and the interest payments will eat around 10% of the company's operating profit. The market, however, doesn't seem to care.