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.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.