Worrying trend of special dividends

WHAT’S not to like about a special dividend? Investors have been enjoying a good haul this year, and it looks set to continue.

The total special dividend payout across the market is unlikely to approach 2014’s outsize distribution of nearly £18bn, because the bulk of last year’s sum was paid out by Vodafone from the sale of its stake in Verizon Wireless in the US. Deals like that don’t happen every day.

Even so, researchers at Capita Asset Services reckon companies will dish out around £2.4bn, which is still a tidy sum.

The Vodafone payout had a distorting effect, but after drying up to a trickle in the peak crisis years of 2009 and 2010, more companies are paying out special divis, and they are doing so more frequently.

So much so that earlier in the year we were treated to headlines telling us that Next shareholders are in line for ‘regular’ special dividends, which sounds like a contradiction in terms.

Another exponent of the regular special dividend is Direct Line. At the time the insurer floated in the autumn of 2012, chief executive Paul Geddes said he would pay out special divis so long as he had spare cash above regulators’ capital requirements. Yesterday the firm offloaded its international division for £430m, with almost all the proceeds – some £412.5m – to be returned to shareholders.

Housebuilder Persimmon has gone further and is not doling out any conventional dividends, only special ones, after promising two years ago to hand back nearly £2bn to investors over nine years.

Laura Foll, who co-manages the Henderson UK Equity Income and Growth Fund, points to speciality chemicals firm Elementis, which has a policy of returning half of its year-end net cash to shareholders via a special dividend along with its ordinary payment.

So what is going on? The traditional reason for a special dividend was to share a windfall with investors, for example the proceeds of an asset sale, as with Vodafone and Verizon.

Another reason is to retain flexibility. Firms may be reluctant to increase the ordinary dividend if they think they will not be able to sustain it, or, as is the case with Elementis, they think they might want the money to do deals. Then a policy of paying special divis allows a company to embark on takeovers if it spots an opportunity, or to hand back the cash if not.

Still, there are grounds for misgivings. Better by far to give spare cash to shareholders than blow it on bad ideas – but executives are paid their vast sums to come up with good ideas and the vogue for special dividends suggests they are struggling to come up with any.

A return of cash to investors can be a sign of a management team that is short on self-belief: one that thinks shareholders can make better use of the money than they can.

This lack of confidence on the listed markets ought to give large and small shareholders pause for thought. They should question where is the growth and the innovation on a stock market obsessed with buybacks, special divis and cost-cutting.

The crisis may have made large companies more risk averse but it has also led to a boom in business start-ups and the emergence of new financing ideas such as crowd-funding. It’s risky, and many ventures will fail, but that is probably where the giants of the future are being born.

Brand gains

WHEN passing regularly through Covent Garden a few years ago, it was noticeable that the financial crisis did not stop shoppers clamouring to buy technology from the Apple store or sheepskin boots from the Ugg boutique, even though they are expensive.

A portfolio of ‘strong brand’ companies compiled by researchers Millward Brown bears this out. It found that $100 invested in 2006 in its ‘Brandz’ stocks would be worth $203 today, compared with $163 in the S&P 500 and $130 in the MSCI world index. What does this tell us?

First, people will always find money to buy things they really want, and companies that consistently provide covetable items will do well. Second, it is trust that keeps customers coming back to a brand. That is why the loss of reputation suffered by once well-regarded banks such as HSBC is so catastrophic.

KPMG snafu

NO ONE should be surprised to find auditors KPMG in the thick of the Fifa scandal.

The firm is already in hot water over its auditing of HBOS and the Co-op Bank, both of which came to the brink of collapse without the beancounters registering that anything was amiss.

Simon Collins, the new-ish boss i n the UK, i s trying hard to improve the quality of audits. But it’s still legitimate to ask: just how big did a problem have to be before KPMG noticed?