As the global economy starts to recover, companies are looking for more ways to reward shareholders and at the same time dispose of some of the extra capital on their balance sheets.
Merger and acquisition (M&A) activity has started to take off, most notably with the recent announcements of Microsoft buying Nokia’s handset business and Vodafone selling its share in Verizon Wireless.
While these deals are generally beneficial to the growth of the company, they can also provide a boost to investors through the decision to pay a ‘special dividend’. Vodafone, in particular, has made use of this idea in the past, paying a special dividend of £2bn in January 2012, and confirming that a further special payout will follow the Verizon sale.
Justin Cooper, chief executive at Capita Regstrars, comments: “Firms should typically pay special dividends when they want to return money to shareholders following exceptional events. For instance, the special dividend paid on Vodafone’s sale of its Verizon business will be the largest ever by a UK firm by a country mile.
“However, listed companies like to display a progressive dividend policy, and many have turned to special dividends as a fig leaf for volatile returns. Firms in highly cyclical sectors usually can’t show steadily growing profits. They use special dividends to allow them to claim a progressive regular dividend policy through thick and thin, with the occasional largesse in the form of a special payment in good times.”
Michael Hewson, senior market analyst at CMC Markets, adds: “A special dividend is a cash payment made by a company to its shareholders that is separate from the normal dividend payment cycle.
“This can be done for a number of reasons – a large cash windfall due to a large disposal, or the company has a particularly good year and wants to reward its shareholders but doesn’t want to raise the normal dividend by a large amount on a one-off basis only to have to reduce it again.”
This process has been adopted by a number of FTSE 100-listed companies in 2013, with Mr Hewson citing the example of Smiths Group, which announced a special dividend worth approximately £118m, or 30p a share, in September after its company profits came in much better than expected.
In spite of this the level of special dividends in the first half of the year is lower than 2012, according to the Q2 Capita UK Dividend Monitor. Although slightly higher than initially forecast, the £1.2bn figure is below last year’s £1.5bn and it appears unlikely special dividends will reach the same high level of £7bn that was seen in 2012.
In the quarterly monitor Capita states: “The mining sector provided the lion’s share [of special dividends], in spite of much weaker operating conditions for the sector.
“In total, 10 companies made special payments. We continue to believe 2013 will be a much more normal year for special payouts. In 2012, they reached 8.7 per cent of the total of all dividends for the year, roughly three times the typical level for recent years. This year, we expect it to be close to 2.8 per cent of the total, roughly £2.2bn.”
The special payments of companies such as Antofagasta, Standard Life and ITV have all helped drive the level of special dividends in the first half of the year.
Chilean-based copper mining group Antofagasta, in particular, helped boost the figures, paying out a special dividend worth £502m, almost half the £1.2bn total.
But while the report recognises that the overall decline in dividend payouts in the first half of 2013 is in part down to the lack of special dividends compared with 2012, it has still “upgraded our expectation for them by £290m for the full year to a little under £2.2bn”.
Meanwhile Mr Hewson notes: “We’ve seen plenty of companies return cash to shareholders in the past year, largely down to the fact that companies probably don’t know what else to do with the surplus cash. We can largely put that down to a lack of confidence with respect to investing in new jobs and growth as a result of the recent weak economic outlook.”
But he warns this could change if the UK and European economies continue to improve.
“This partly explains the recent pick up in M&A activity as companies start to put their money to work and do deals that either improve their business models or diversify them,” he adds.
