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Dividends Revisited

In light of the recent declaration of a special dividend by Microsoft I would like to revisit this topic. Dividends were discussed in the May 2 commentary of this year. To reread that commentary it is available in the file index. In fact I want to speak directly about one of the key points of that commentary specifically the impact of a special dividend on a stock.

With Microsoft's declaration just about every analyst out there has been calling upon every other company with a stash of cash to distribute their money as well. Microsoft has the largest cash position of any company I have ever heard of; I believe it is the largest cash accumulation in history. Microsoft also cannot find a use for $75 billion that has accumulated over the years. I think they would rather use the cash to purchase rival companies and expand the reach of Microsoft's products. But given all the pressure and government resolutions against Microsoft in recent years it has left Microsoft with no chance of buying out competitors. The monopoly concerns the government would not allow it. Their decision has been to buy back there own stock and give the cash back to the shareholders. 

 If there is enough pressure placed on the other companies with large cash holdings we may begin to see a run in those stocks. INTC is now considering a similar move with either a cash distribution or a repurchase of stock.

 A cash distribution will typically drop a stock by the same amount as the distribution.  People who are unaware of this when they hold a stock often get scared when the stock price suddenly drops after the X dividend date. Conversely when people hear that a company is handing out free money'; they often flock to the stock hoping for a handout.

 A dividend can be a good thing to a value investor who buys a stock never sells it and really appreciates a yearly dividend. Many people invest this way they search for stocks that pay dividends then buy and hold them for the long term. This generates income for them but of course these stocks are usually older more mature companies whose stock prices do not move very much in either direction. This is good for older individuals closer to retirement age.  

 If you review the May 2nd commentary you will find a strategy that you could put to use in the coming weeks and months. If Intel breaks down and decides to issue a distribution we may begin seeing the rest of the cash rich companies following suit. If that's the case we could benefit from a short term runup in stock price into the distribution date. Just remember: these distributions take value right out of the stock the second they are handed out so you would want to sell before the X dividend or there is no benefit for the short term trader.

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