In the world of investing, there is a select group of stocks that are showing promise in providing investors with a unique opportunity for both unexpected income and price appreciation. According to Todd Castagno, a strategist at Morgan Stanley, special dividends, which are one-time payments made to shareholders outside of a company’s regular dividend cycle, have the potential to result in higher share prices. These nonrecurring dividends stem from various factors such as the distribution of excess cash or changes to a company’s capital structure.
Recent examples of companies issuing special dividends further highlight the positive impact these one-time payments can have on share prices. For instance, Six Flags recently announced a special dividend of $1.53 per share, coinciding with the expected closure of its merger with Cedar Fair on July 1. Castagno emphasizes the importance of a consistent, ordinary dividend as a positive signal to the market, while special dividends serve as a bonus that implies optimism related to M & A synergies, secular tailwinds, and other extraordinary events.
Morgan Stanley’s research reveals that companies distributing special dividends have outperformed the market, with share prices beating market averages by 4.1% in the six months following the announcement and 7.8% in the twelve months after the news. This significant outperformance highlights the potential benefits of investing in companies that offer special dividends on top of their regular dividend payments.
Morgan Stanley has identified a group of “special dividend hopefuls,” companies that currently pay ordinary dividends and maintain a net cash position above 1% of market capitalization. Alphabet, the parent company of Google, is one such hopeful. With a recent authorization for a dividend of 20 cents per share and a $70 billion share repurchase, Alphabet has demonstrated its commitment to returning value to shareholders. Additionally, the company’s advancements in artificial intelligence and strong performance in the tech sector make it an attractive prospect for investors seeking growth opportunities.
Paychex, a leading payroll provider, is another company on Morgan Stanley’s list of potential special dividend payers. Despite a modest 3.1% dividend yield, Paychex has shown a steady uptrend in its share price. EOG Resources, an energy stock with a dividend yield of 2.9%, has also caught the attention of analysts. With a positive outlook on future growth and a significant upside potential, EOG is positioned as an undervalued asset in the energy sector.
Analysts covering these potential special dividend payers have varied views on their prospects. While Alphabet garners strong support from Wall Street analysts, with a majority rating it as a buy or strong buy, Paychex and EOG Resources receive mixed reviews. Despite the lukewarm sentiment from some analysts, these companies possess fundamental strengths and growth opportunities that could lead to increased investor interest in the future.
Overall, the appeal of special dividend stocks lies in their ability to offer investors a unique combination of income and growth potential. By identifying companies that have the capacity to issue special dividends and analyzing their performance and market outlook, investors can take advantage of these opportunities to enhance their investment portfolios.