Definition: Special distributions are one-time additional payments. They often occur when a company has unexpected cash on hand, and may indicate underlying issues.
How do special distributions work?
Special distributions are cash payments to the company’s shareholders. They are usually in cash and can be issued when the company experiences unusually strong profits.
Why do companies pay special distributions?
Companies may pay special distributions to reward shareholders when profits are unexpectedly high or during corporate restructuring. For example, in 2018, Australian mining company BHP announced it would distribute $5.2 billion to shareholders in the form of a special distribution of $1.02 per share. The company also repurchased $5.2 billion worth of shares. The funds for the special distribution and share buybacks came from the sale of the company’s shale oil operations in the U.S.
Special distributions vs. regular distributions
Special distributions differ from regular distributions, which occur regularly. They are separate from the regular distribution and do not increase its size.
Notable special distributions
While most companies will not issue more than one special distribution, several companies have broken this trend. Camping World announced a special distribution of $0.77 per share in November 2020. However, the strength of the outdoor and recreational vehicle market in 2020 boosted sales enough for the company to issue multiple special distributions that year.
Drawbacks of special distributions
While receiving extra cash may seem like a good thing, there are drawbacks to the decision to issue special distributions. Special distributions immediately lead to a drop in the company’s stock price by the amount of the distribution. This also happens with regular distributions but is more pronounced when special distributions are announced. If you sell the shares shortly after the special distribution is issued, the drop in stock price may negate the cash gain you receive from the distribution.
Even if the company has plenty of cash on hand, not everyone agrees that issuing a special distribution is the right step. There are other important things the company could do with the extra funds for growth or improvement, such as making acquisitions, investing in research and development, creating new product lines, increasing wages or bonuses for workers, or keeping it as a cushion for rainy days.
A special distribution may signal that the company is having difficulty finding new investments or acquisitions. This can indicate a weak growth outlook.
One of the most famous examples of this occurred in 2004 when Microsoft announced a special distribution of $3 per share while its regular distributions were only $0.04 per share. Although shareholders were pleased to receive the extra cash, they also wondered why they were receiving money instead of seeing it go towards expanding the business. By issuing a special distribution, Microsoft may have sent a message that it had not identified ways to generate more revenue and high returns.
Impact of taxes
Special distributions may cause issues for investors at tax time. Unlike regular distributions, which may be taxed as qualified dividends and subject to long-term capital gains tax, special distributions may be considered a mix of capital gains and ordinary income with a return of capital. Return of capital is not a taxable event, and long-term capital gains rates can be as low as 20%, but ordinary income tax rates range from 10% to 37%, depending on your total income.
Most investors can anticipate and plan for how regular distributions will affect their taxes. However, special distributions often come as a surprise. This can lead to a large and unexpected tax bill.
Questions
Frequently Asked Questions (FAQs)
Why is the company issuing a special dividend?
Companies generally pay special dividends when they have a large amount of excess cash and want to reward shareholders. Companies may also pay special dividends when restructuring, such as selling a division, which brings in unwanted cash.
Should I buy shares of a company that announced a special dividend?
Generally, it’s not a good idea to chase special dividends. This is because once the company’s special dividend date arrives, the stock price drops nearly by the amount of the special dividend. Your total investment value remains the same and you don’t gain any benefit from the special dividend.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
U.S. Securities and Exchange Commission. “Dividend Distribution.”
Ethan Allen. “Ethan Allen Announces Special Cash Dividend and Regular Quarterly Cash Dividend.”
BHP Group. “BHP Successfully Completes $5.2 Billion Share Buyback and Announces a Special Dividend of $1.02 Per Share.”
Nasdaq. “KO Dividend History.”
Camping World Holdings Inc. “Camping World Announces Regular Quarterly Dividend and Special Dividend of $1 Per Share.”
Camping World. “Form 10-K,” page 77.
U.S. Securities and Exchange Commission. “Investor Announcement: Real Estate Investment Trusts,” page 1.
Fulton Bank. “Stock Splits and Dividends.”
Fidelity. “Why Dividends Matter.”
Microsoft. “Microsoft Clarifies Quarterly Dividend and Four-Year Stock Buyback Plan and Special Distribution for Shareholders.”
Internal Revenue Service. “Internal Revenue Service Provides Tax Inflation Adjustments for 2022.”
Source: https://www.thebalancemoney.com/what-are-special-dividends-4590243
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