Definition
A special dividend refers to a non-recurring distribution of company earnings, assets or cash to its shareholders, which is separate from the regular cycle of dividends. It’s typically larger than normal dividends and often occurs when a company has had exceptionally strong earnings or has built up surplus capital. It can be issued in the form of cash, shares of stock, or other property.
Key Takeaways
- The first takeaway about the finance term Special Dividend is that it is a non-recurring distribution of a company’s earnings to its shareholders. This dividend is paid out in addition to the company’s regular dividends, and often signifies a period of strong company profit or surplus cash on hand.
- Secondly, while receiving a special dividend may be financially beneficial for shareholders in the short term, it may also indicate that the company does not foresee any value-adding investments or acquisitions to invest that surplus cash, therefore distributing it back to the shareholders.
- The third takeaway is that special dividends can affect a company’s stock price. Before the special dividend is paid, the stock price typically rises and then drops by the amount of the special dividend after the payment is made. Shareholders who hold the stock through the “ex-dividend date” will receive the special dividend, but those who sell before this date may not.
Importance
A Special Dividend is a notable financial term mainly due to its impact on both a company’s value and shareholder wealth.
A company may choose to pay a special dividend in situations of remarkably high profits or after the sale of a business or valuable asset, which signals robust financial health.
As one-time or non-recurring dividends, these payouts posit substantial cash returns to shareholders over and above regular dividends, thus increasing shareholder satisfaction and loyalty.
Overall, they serve as a credible indicator of a company’s strong financial position and its desire to distribute excess cash directly back to shareholders.
Explanation
A special dividend is typically a one-time distribution of cash to shareholders outside of the regular dividends an organization typically remits. It is usually derived from exceptional profits garnered from events such as the sale of a business unit or windfall gains.
This type of reward is mostly issued when a corporation wants to return surplus cash to its investors. Although it can also be utilized as an alternative way to refashion the company’s capital structure or signal to the market about the firm’s strong financial position.
Moreover, the provision of a special dividend may serve as a strategic mechanism used by management to command investor sentiment positively. It often signals to the market that the company is in a healthy financial position capable of generating excess profits, thereby potentially increasing investor confidence and potentially influencing the company’s stock price.
Despite being a more unpredictable income source for investors due to its irregular and unique nature, special dividends can present an attractive income proposition for investors seeking to capitalize on a company’s extraordinary performance.
Examples of Special Dividend
MicroStrategy Special Dividend: In 2007, MicroStrategy, a business intelligence, mobile software, and cloud-based services firm, announced a $300 million special dividend, or approximately $20 per outstanding share. The special dividend was spurred by strong revenues and cash position, aiming to return capital to shareholders and boost its stock price.
Microsoft Special Dividend: One of the most memorable special dividends in the tech sector was the one paid by Microsoft in
Microsoft had accumulated a substantial cash reserve (estimated to be over $60 billion) and needed a way to return some of its wealth to its shareholders. As a result, they paid out a special dividend of $3 per share, an equivalent of $32 billion, to shareholders.
Ford Motor Company Special Dividend: In 2016, the Ford Motor Co. announced a special dividend payout to its shareholders because it had a solid year with strong financial results. The company declared a supplementary $1 billion special dividend, alongside its regular first-quarter dividend.
FAQs on Special Dividend
What is a Special Dividend?
A special dividend is a non-recurring distribution of a company’s earnings to shareholders, initiated by the company’s board of directors. It is separate and in addition to any regular dividend that the company may issue.
How are Special Dividends distributed?
Special dividends are paid out similarly to regular dividends, usually as cash payments, but can occasionally be in the form of additional shares of stock. The board of directors announces the terms and timing of the special dividend.
When is a Special Dividend paid?
A special dividend is typically paid when a company has exceptionally strong earnings results, or after it sells a large valuable asset. Additionally, they may be issued in situations where the company wants to change its financial structure or spin off a subsidiary company to its shareholders.
How does a Special Dividend affect the share price?
Upon the announcement of a special dividend, the share price will generally go up as investors are attracted to the prospect of a one-time payday. However, on the ex-dividend date, the stock’s price generally decreases by roughly the same amount as the dividend paid.
Why do companies issue Special Dividends?
Companies may issue special dividends for several reasons. It could be due to excessive cash reserves, a significant increase in earnings, asset sales, or a change in a company’s financial strategy.
Related Entrepreneurship Terms
- Extra Dividend Payouts
- One-Time Dividend
- Shareholder Distributions
- Return of Capital
- Dividend Policy
Sources for More Information
- Investopedia: A comprehensive online source that provides definitions and detailed explanations of financial terms and concepts.
- CNBC: This resource offers financial news, analysis, and education, often explaining complex financial terms in understandable ways.
- Morningstar: A well-respected financial services firm that provides in-depth investment research and analysis, education, and tools.
- Seeking Alpha: A platform for investment research, with broad coverage of stocks, asset classes, ETFs and investment strategy.
