3 Companies That May Pay the Next Special Dividend

NEW YORK (TheStreet) -- It was the morning of November 27, a sleepy Tuesday in my neck of the woods. I looked at my "wish list" of stocks I might want to buy before the "Santa Claus rally" commenced.

Having just visited my local Costco ( COST) the evening before, I decided to check the opening price. COST had opened the morning of the 27th at $96.30. Talking to myself as I sometimes do, I said, "if it pulls back to $95 I'm going to buy some shares". Famous last words!

Shares of COST never dipped below $95.77 that fateful day. By the time I checked my trading account the next morning, shares had opened at $100.44 and by the end of Wednesday's trading session the stock closed at $102.58, up $6.07 from Tuesday's closing price of $96.51.

I swallowed hard and resisted the urge to kick myself. After all how could I have known what was to be announced after I went to sleep Tuesday evening? The proclamation from on high was that COST was going to give its shareholders a special cash dividend of $7 per share. Those fortunate enough to own shares at $96 were suddenly getting a 7.29% unexpected holiday bonus.

Payment will be made to shareholders of record as of the close of business on December 10 and will cost the company approximately $3 billion. It will be in addition to the company's regular quarterly dividend of $0.275 per share, which gets paid out Nov. 30.

The CFO of COST told the financial world why they were being so generous. He characterized it as their "latest effort in returning capital to our shareholders while maintaining our conservative capital structure." Mr. Galanti went on to say that the company's "strong balance sheet," which includes total cash (most recent quarter) of $4.85 billion, allowed Costco to be so good to their shareholders.

Although I was happy for all those lucky folks who were not only getting this incredible bonus but were also going to receive the company's regular quarterly dividend of $0.275 per share, which will be paid on November 30, I started wondering which companies might be the next surprising benefactors.

After all, any dividend paid out by December 31 will benefit from the current, low, 15% tax rate on qualified dividends. After the dawning of 2013, however, the maximum tax rate on dividends may increase to as high as 43.4% for top income earners.

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Of course that would only happen if Congress decided, with the president's approval, to begin taxing dividends at ordinary income tax rates and applies a 3.8% surtax to pay for the Patient Protection and Affordable Care Act. A compromise may be reached before midnight on December 31, but no one seems certain one way or another.

So who will be the next big-time, special-dividend donor that hasn't already broken the good news? The first likely suspect may be Apple ( AAPL). Talk about a strong balance sheet! AAPL can boast a $29 billion cache in total cash and absolutely no debt. They can afford to be generous with plenty left over.

Another likely possibility would be ConocoPhillips ( COP) which recently announced plans to sell its 8.4% interest in the Kashagan oil project in the Caspian Sea. The proceeds from the sale would be close to $5 billion and would be a big step in COP's goal to divest itself of billions of dollars of assets this year and next.

COP is in the process of a three-year repositioning, "aimed at improving its balance sheet and focusing on more profitable and less risky unconventional fields in North America," according to a Wall Street Journal article on November 27.

"Its plan includes $15 to $20 billion in asset disposals, large-scale share buybacks a sort of tax-free dividend and the spinoff earlier this year of its refining arm..." the Journal reported. The Kashagan deal is expected to close in the first half of 2013 which would add to existing asset sales increasing the total to $7 billion.

COP's operating cash flow (trailing 12 months) as of September 30 was close to $16 billion, but their total cash was a diminutive $1.27 billion, making a large special cash dividend less likely. At a price of $57-per-share, COP already gives a dividend yield-to-price of 4.63%, one of the most generous among big energy companies.

The one-year chart below demonstrates COP's share price movement after it spun off Phillips 66 ( PSX) compared to its dividend payout ratio. Currently it's at a modest 33% of earnings. COP Chart COP data by YCharts

If you're looking for the next Costco-style special dividend, look for companies with lots of cash on its balance sheet. Also look for a company that has received well-deserved criticism for hoarding cash instead of being extra generous with its shareholders.

One such company that comes to mind is Microsoft ( MSFT) which fits that description to a "T". This would be an auspicious time for MSFT to offer a special dividend payout, having just had its one-year price target lowered by Jefferies to $31.

As of September 30 MSFT was sitting on a boatload of cash. Its total cash is over $66 billion and their levered free cash flow is a mighty $24.45 billion. If MSFT doesn't think it should give shareholders a special, end-of-the year dividend windfall, all I can say is "give me a break." If any company should pay out a bonus dividend, Microsoft should be the poster-child.

At the time of publication, the author was long AAPL, COP and MSFT.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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