Special Dividends - The reasons behind them

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Some extra cash is always welcome. More so, if it is from stock investments in a depressed market. That is why investors are all ears when a company announces a special dividend. They are very happy that they will get some extra cash which comes tax-free. In April, Navin Fluorine announced a special dividend of . 60 per share on account of higher income of . 251.90 crore from the sale of carbon credits; Infosys gave a special dividend of . 10 per share to mark the completion of 10 years of its BPO operations. In August 2011, Clariant Chemicals India gave a special dividend of . 30 per share on account of the sale of its Thane property for . 240 crore; and JB Chemicals gave a special dividend of . 40 per share on account of the gain from the sale of its Russia-CIS OTC business. Companies that dole out special dividend are viewed favorably by investors, and could be a starting point to look at a stock. However, look at the future potential of the business, do your math and check how the business has performed minus the special dividend before making a decision


Special dividend doesn't make any company a great investment. You havet of in doubt the real as on behind it before betting on the company. For example, as you have seen, every company has a different reason to announce the special dividend. In some cases it could be the sale of an asset or land, or an one-time windfall gain or a special occasion such as the company's silver or golden jubilee. "Special dividend indicates that the management is shareholder-friendly and is willing to share profits with minority shareholders. This indicates the company is transparent, which is a big plus for any shareholder. A special dividend could also indicate that the company may not have enough avenues to deploy that money. That is why it is giving the money to shareholders.

In the case of Clariant Chemicals, the company sold off part of its land at its Thane unit. Since land is a noncore asset, and does not affect the sales or profitability of the company, it is in the interest of the shareholders. However, the same may not be the case with JB Chemicals, where the company sold its Russia –CIS OTC business. Doktor Mom was amongst the top selling cough syrup OTC brands in Russia and the sale did not go down very well with analysts. On the day the deal was announced, the stock was down 13% on the BSE. After paying out the special dividend the stock has fallen from . 96.5 on August 29, 2011, to . 67 now.

If you are satisfied with the reason behind the dividend, you can turn your attention to the fundamental business and study its future growth potential. For example, Clariant Chemicals has zero debt on its balance sheet and the parent has charted out aggressive growth plans for India. That makes it a strong candidate for investing. Clariant is focusing on supplying to the growing Indian automotive sector and biotechnology industry. It will triple its India sales by 2016, indicating a growth of 25% year on-year. All these, couple with a strong parentage, make it a good investment bet. However, he advises a wait-and-watch approach when it comes to JB Chemicals. One should see how the company performs in its domestic formulations business.

Dividend Yield Will Not Work in case of special dividend

When a company declares a special dividend, investors tend to calculate the dividend yield of the stock. In many cases the dividend yield looks attractive and investors jump in to buy. Take the case of Navin Fluorine, which has paid a special dividend of . 60 per share. This, along with the interim and final dividend of . 15 per share, takes its total dividend to . 75 per share for the year 2011-12. On a share price of . 420, this translates into a dividend yield of 18%. Similarly, in the case of JB Chemicals, the stock was quoting at. 140inAugust2011,priorto the special dividend declaration, giving an yield of 28.57%. Special dividends are one-time payments, and the management does not intend to pay them every year. That is why calculating dividend yields for such stocks does not make any sense. Once the dividend is paid out, the stock would fall or correct to the extent of the dividend paid.

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