The one thing the fiscal cliff brings that is actually a good thing is many strong companies are looking to special distributions to take some of the sting out of new tax laws, notes Jim Fink of Investing Daily.
During the last three months of 2010—the last time the Bush tax cuts were set to expire—more than 150 companies announced special dividends.
To guard against a rise in dividend rates now, several companies are likely to announce special dividends during the last months of 2012 to take advantage of the current 15% tax rate. Here are seven prime candidates to announce a special dividend between now and the end of 2012.
Why is this important? After all, don’t stock prices fall by the amount of any dividend payout?
Yes, that is true—on the ex-dividend date. But there is evidence that investors bid up the price of a stock significantly between the date a special dividend is announced and the ex-dividend date.
Bottom line: special dividends can create trading opportunities. The key is to buy the stock before the special-dividend announcement, and that is why the list of stock candidates below should be of interest to investors.
Since corporate executives don’t always have the average shareholder’s financial interest as a top priority (unfortunately), I believe a company is more likely to issue a special dividend if corporate insiders own a large chunk of company stock and would personally benefit from the dividend payout.
The company must also generate enough cash to pay a large dividend, and not be burdened by a lot of debt. Consequently, I screened for stocks where:
- Insiders own at least 30% of shares outstanding
- Free cash flow is greater than 10% of the stock’s market cap
- Debt-to-capital ratio is less than 30%
The stock screen found seven special-dividend candidates:
- NCI (NCIT), which is involved in cybersecurity software.
- GameStop (GME), the video-game retailer.
- ManTech International (MANT), which is involved in electronic warfare.
- Nasdaq OMX Group (NDAQ), the securities-exchange operator.
- Molina Healthcare (MOH), which provides Medicaid insurance plans.
- Legg Mason (LM), a money-management firm.
- Cross Country Healthcare (CCRN), a health-care staffing and outsourcing company.