A closer look at special dividends
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Christine St Anne is Morningstar's online editor.
Both Woodside Petroleum (WPL) and Westpac Banking Corporation (WBC) recently announced special dividends. The news captured the attention of investors who are hungry for yield in an environment of falling interest rates.
Special dividends are essentially one-off dividend payments that are made at management's discretion.
These special dividends often imply either an exceptionally good set of circumstances for the company or that there is a reason the company is not spending the money, according to Morningstar sector head of basic materials, energy and utilities Mathew Hodge.
Special dividends are also often reported as one-off items and treated separately from the ordinary dividend. This prevents investors from being blindsided into thinking the company's yield is higher than it actually is.
A fistful of cash
Companies are increasingly paying special dividends on the back of strengthened balance sheets following the global financial crisis (GFC) of 2007.
The recent reporting season further highlighted a relatively strong corporate sector, with many companies either meeting or exceeding expectations.
Despite the strength of many Australian companies, economic growth remains subdued and challenges remain given the stubbornly high Australian dollar. So, instead of pursuing growth opportunities, companies are looking to return excess capital to shareholders.
Companies are also responding to greater appetite for income from both retail and institutional investors as Australia's population continues to retire.
Moreover, the value of the share market is spurring many companies to choose special dividends over buybacks.
The decision to conduct buybacks depends on whether a company believes its share price is undervalued, according to Russell Investments portfolio manager Scott Bennett.
"Given the current strength of the share market and with share prices kind of at full valuations, many companies are choosing to go down the special dividend path," Bennett says.
The capacity to pay
Understanding whether a company has the ability to pay out these special dividends depends on the sector.
For the banking sector, investors need to look at capital ratios, Morningstar's Hodge says. The capital ratio measures the percentage of a bank's capital to its risk-weighted assets.
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