NEW YORK ( TheStreet) -- For some reason, traders gravitate toward special dividends, and there have been a rash of them lately.
Take Costco (COST - Get Report), for example, which was up 6% to $101.88 Wednesday, within a few dollars of its all-time high, on word that management was returning $3 billion of cash to shareholders in a one-time dividend.
One time -- that's the problem. Costco's dividend of $7 a share can be funded primarily with cash on hand; cash that shareholders already had a right to. Rather, management has decided to sell new debt to cover the payout. The one-time dividend is equal to 6.4 years' worth of the retailer's regular quarterly payout of $0.275, a 1.1% yield. To me, that sounds odd for a growth company that's only been paying a dividend for eight years.
Just as I don't like to see regular dividends that can't be covered with earnings, special dividends should be covered without the need for external financing. No value was created through this one-time payout, but the stock gained $2.6 billion of market value in one day on news of the dividend and a November same-store sales report that merely matched expectations.The reason we are seeing more of these one-time payouts is a likely increase in tax rates on dividends as we approach the fiscal cliff. Whatever the reason, paying taxes on profits is a good problem to have. Ultimately, investors want growth, and they will pay a premium for it. Even with dividends, I'd rather see a 2% or 3% yield that grows every two or three years, and can be comfortably covered with earnings, than an 8% yield that may or may not be paid out. The bottom line: Special dividends aren't bad, but they do little to help investors. A steadily growing dividend rewards long-time investors for sticking around, especially in this low-interest-rate environment. Share buybacks cut the amount of shares outstanding, which helps boost earnings per share for a profitable company, but a special dividend is just a return of capital. At best, it's an admission that management isn't smart enough to invest the money in ways that grow the business better. At worst, it's a case of management lining its pockets, especially if they need to raise more debt to fund the payout. Here are three recent special-dividend announcements that I believe have been of little service to the average investor and should give readers pause before committing new funds. Dillard's (DDS - Get Report): The special dividend of $5 a share is equal to 25 years' worth of the regular quarterly dividend of $0.05 a share, a 0.2% yield. The retailer does not have enough cash to cover the one-time payout. The Dillard family and Dillard's Retirement Trust own about a third of the total shares outstanding and will earn $78 million from the payout. Las Vegas Sands (LVS - Get Report): The special dividend of $2.75 a share is just under three years' worth of the regular quarterly dividend of $0.25, a 2.1% yield, which the casino operator only started paying earlier this year. The company has enough cash on hand to cover the one-time payout, but has 2.5 times more debt than cash on its balance sheet. What I find even more intriguing is that Founder, Chairman, CEO and Treasurer Sheldon Adelson owns more than 51% of the total shares outstanding. It must have been easy to convince the board to declare a special dividend, as Adelson will receive a $1.17 billion payment. Westlake Chemical (WLK - Get Report): The special dividend of $3.75 a share is equal to five years' worth of the regular quarterly dividend of $0.1875, a 1% yield. The company has enough net cash on hand to cover the one-time payout. Note that the Chao family, which controls about 69% of outstanding shares, will receive $172.5 million in the payout.