Investors who pursue stocks that deliver consistent quarterly or monthly dividends, and rely upon steady increases each year, discovered a lucrative alternative in 2022: stocks that issue head-spinning special dividends.
Some companies that were flush with cash – but saw little opportunity to invest in growth or acquisitions – delivered a hefty chunk of their cash flows to investors in the form of “one-time” distributions.
In the case of some energy producers that benefited from strong commodity prices in 2022, these dividends began to appear quite frequently during the year.
“What else do they do with the money? They’ve paid down their debt, there’s no additional pipeline to exploit the product, so there’s not much they can do,” said Laura Lau, chief investment officer at Brompton Group.
Tourmaline Oil Corp. TOU-T is arguably the clearest example of the trend of turning one-time distributions into the sort of dividend payouts that become impossible for yield-loving investors to ignore.
The Calgary-based natural gas producer’s annualized base dividend is $1 a share, which points to an official dividend yield of 1.2 per cent. Nice, but hardly enough to divert attention from the significantly larger yields offered by telecoms, banks and pipelines.
However, the price of natural gas surged by as much as 170 per cent from January to August and remained elevated later in the year as well, contributing significantly to Tourmaline’s cash flow.
Rather than let the money accumulate, the company distributed four special dividends in 2022, totalling $7 a share, up from a total of just 75 cents a share in 2021.
Combined with the regular base distribution, this year’s overall trailing yield on the stock was about 10 per cent, making Tourmaline one of the most lucrative dividend plays in Canada.
Special dividends have been issued by cash-flush companies for years. Costco Wholesale Corp. COST-Q, in particular, has established a reputation for issuing one-time cash distributions every few years.
In 2022, though, Canadian companies were particularly generous, distributing a combined $14.55 a share, up 18 per cent from last year. Consider that in 2018, a recent low point for commodity producers because of low prices, special dividends came to a total of just 50 cents a share.
Energy companies, including Canadian Natural Resources Ltd., Cenovus Energy Inc. and Crescent Point Energy Corp., were active this year. But there were others, too.
Most notably, steelmaker Stelco Holdings Inc. STLC-T announced a $3 special dividend in November, in addition to boosting the regular dividend by 40 per cent, to 42 cents a share. The company also retired 29 per cent of its outstanding shares through buybacks during the year.
But how should investors approach dividends that can fluctuate?
Though no one is likely to complain about receiving cash, special dividends don’t tend to support a stock’s valuation the way a regular dividend can.
“It’s a one-time event, and it’s going to be treated that way,” said Steve Arpin, Canadian equity managing director at Beutel Goodman.
He looks for stocks that trade at a discount to his assessment of their intrinsic value, aiming to generate a 50-per-cent total return over three years.
“In Canada, that’s inclusive of dividends. But we wouldn’t be thinking about special dividends because we wouldn’t necessarily know that they were coming,” Mr. Arpin said.
The other problem with special dividends is that they don’t signal any particular outlook about a company’s prospects in the year ahead.
“A permanent dividend increase can be much more welcomed, because it means you really have a lot of confidence in your future. When you do a special dividend, it means you’re not as confident,” Ms. Lau said.
Finally, special dividends may become less popular next year, ahead of Ottawa’s introduction of a 2-per-cent tax on share buybacks, starting in 2024. Some observers expect that companies will take advantage of buybacks before the tax is imposed.
After that, investors who prefer cash distributions may be rewarded.
“Post-2024, companies may well shift from buybacks to special, or variable, dividends,” Ian de Verteuil, an analyst at CIBC World Markets, said in a November note.
If substantial special dividends were largely the domain of commodity producers in 2022, the field may be about to get a lot bigger.
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