Special Dividend Definition

What is a special dividend?

A special dividend is a one-time distribution of company assets, usually in the form of cash, to shareholders.

A special dividend is generally larger than the normal dividend dividends paid by the company and is often tied to a specific event such as an asset sale, corporate restructuring, spin-off or other spin-off event. Special dividends are also called additional dividends.

Key points to remember

  • A special dividend is a one-time distribution of company assets, usually in the form of cash, to shareholders.
  • Most special dividends are larger than normal dividends paid to shareholders and are tied to a certain event.
  • Special dividends can also arise when a company wishes to make changes to its financial structure or sell a subsidiary to its shareholders.
  • Most companies do not pay more than one special dividend in their history.
  • Although they are a boon for investors, special dividends have certain drawbacks, such as a reduction in the share price and sometimes the perception of a company with no growth potential.

Understanding a special dividend

Special dividends are usually declared after exceptionally strong earnings results for a company to distribute profits directly to shareholders. Windfall dividends can also arise when a company wishes to make changes to its financial structure or spin a subsidiary company company to its shareholders.

A special dividend is usually a one-time payment and a company most often does not receive many special dividends. Special dividends also have some disadvantages, such as reducing the company’s stock price by the amount of the dividend. If an investor then sells their shares directly after the dividend payment, at the lower price, they will cancel the benefit of the special dividend.

Some investors also believe that if a company issues a special dividend, it misses new growth opportunities in the future and, therefore, may lose confidence in the stock.

One of the most famous special dividends was that of Microsoft in 2004. The company issues a dividend of $3 per share, for a total of $32 billion. Its normal dividend was $0.04 per share.

Special dividends and traditional dividends

While a special dividend is non-recurring, traditional dividends are generally more regular (for example, monthly or quarterly). A company’s board of directors makes the decision to issue dividends over specific payout periods and rates. These could be in forms such as a stable dividend policy, target payout ratioconstant payout ratio or residual dividend model.

Startups and other high-growth companies pay dividends more rarely than established companies, such as those in basic materials, oil and gas, banking and finance, healthcare and pharmaceuticals, and utilities . Software companies, for example, often report losses in their early years and must funnel all profits back into their business to support their expansion.

In contrast, larger, older companies with more predictable earnings tend to pay regular dividends to maximize shareholder wealth. Companies structured as master limited partnerships (MLP) and real estate investment trusts (REITs) are considered major dividend payers. Companies that add a special dividend to their schedule signal their confidence in the business and declare that they will continue to be able to create shareholder value without holding onto excess cash.

Examples of special dividends

For example, in 2017, Red Bull GmbH distributed 500 million euros ($617.3 million) as a special dividend. This is on top of the €263.4 million the Austrian company paid out in regular dividends in 2016. Red Bull had an impressive year, selling over 6 billion cans of its caffeinated energy drink, generating 6 .3 billion euros in turnover. Thus, the special dividend was created from operations that were stronger than expected for the financial year.

Events outside of a company’s operational performance may also give rise to a special dividend. In 2018, North Carolina-based financial firm BB&T announced a special dividend to shareholders with some of the money it expected to save from lower corporate tax rates. BB&T paid a non-recurring, one-time dividend of $0.045 per common share on March 20, 2018. The special dividend was in addition to the company’s regular dividend of $0.33 per common share paid on March 1, 2018.

As a more recent example, in 2022, EOG Resources, Inc., an energy and natural resources company, announced a special dividend of $1.50 per share worth $1.1 billion. .

Why do companies pay special dividends?

Companies may choose to pay a special dividend to distribute windfall profits, from a restructuring, or to reward shareholders. By declaring a special dividend, a company can also signal to the market that its finances are sound and that it has good prospects for growth.

What are the disadvantages of paying a special dividend?

For companies, a special dividend can drain them of cash that could have been used for better opportunities, such as expansion or investment. If the outlook for the business turns negative, this money may also have helped provide a cushion.

How are special dividends taxed?

Special dividends, whether paid in cash or stock, may be taxed as a capital gains distribution to shareholders, but portions of a special dividend may be taxed as ordinary income instead. This will vary depending on the structure of the special dividend and the company paying it.

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