In this article I write about three stocks that pay in effect an annual special dividend. A special dividend can substantially increase the dividend yield. But in most cases the special dividend is irregular and may occur once every few years. For example, Costco Corporation (COST) is well-known for paying a special dividend every few years. But Costco often trades at a premium to the broader market, and currently, Costco is trading at a premium to historical valuation multiples. I have also written about MSC Industrial Direct Co. (MSM), which also pays a periodic special dividend.

However, in my research I have come across several stocks that basically pay an annual special dividend with extra cash on hand on top of the quarterly regular dividend. This increases the yield of these stocks dramatically. I have previously written about Lazard Ltd. (LAZ), Ford Motor Company (F), and Cracker Barrel Old Country Store, Inc. (CBRL) as stocks that pay an annual special dividend and yield over 5%. Below I discuss three more stocks in three different industries that have been paying an annual special dividend. In some cases, this payment goes back for many years. These stocks may be suitable for small investors seeking income.

Source: Seeking Alpha

Southside Bancshares, Inc.

Southside Bancshares (SBSI) is a small regional bank that has about 59 branches and 81 ATMs in Texas. The banks operations are mostly in East and North Central Texas. The bank offers personal, commercial, and mortgage banking services. It also has a presence in wealth management and brokerage services. In the bank’s home market of Tyler, Texas, it has a 39% market share. Southside Bancshares has nearly $6.5B in total assets making it about the 9thlargest bank in Texas.

Southside Bancshares is a dividend growth stock and one with a decent yield. As a dividend growth stock Southside has raised the dividend for 25 consecutive years making it a Dividend Champion. The current forward regular quarterly dividend is $1.22 giving a current yield of over 3.6%. The dividend is well covered with a payout ratio of only 52.8% based on consensus 2019 EPS estimates of $2.31. This is below my requirement of 65%. The regular dividend is also well covered by free cash flow of $111M and a regular dividend requirement of about $42.2M. This gives a dividend-to-FCF ratio of 38%, well below my threshold of 70%.

Southside Bancshares has paid an annual special dividend since 2004. This dividend was previously a stock dividend of 5%, but this was ended in 2017. The bank did not have sufficient retained earnings to pay the stock dividend due to the increasing number of shares combined with the appreciation in stock price. In 2018, the bank paid a special dividend of $0.02 in cash. This is not significant, but it does add a bit to the yield.

Southside Bancshares is trading at P/E multiple of about 14.6 based on consensus 2019 EPS. This is below the trailing 5-year multiple of 19.2 so from that perspective the bank is undervalued. Notably, the stock price has bounced around between about $30 and $35 per share since early 2017. I believe that the stock traded in this range due to a slowdown in asset growth and an increase in the cost of funds. But with that said, this is a conservatively run bank and is well capitalized. This combined with the good yield, dividend coverage, dividend growth, and special dividend makes this stock a buy for me.

PACCAR Inc

PACCAR (PCAR) is manufacturer and seller of medium- and heavy-duty trucks. The company is not that well known. But PACCAR’s brands are. It has familiar brands in North America including Kenworth and Peterbilt. In Europe and South America, the company sells the DAF brand trucks. But PACCAR is a major player in heavy-duty trucks with about 29% market share in North America and 17% market share in Europe. PACCAR’s total revenues in 2018 was about $23.5B.

PACCAR is a dividend growth stock that has raised its dividend for nine straight years. The streak would have been longer, but the company cut the dividend in 2008 – 2009 and it also did not pay the special dividend in 2009. The Great Recession reduced the top and bottom lines since medium- and heavy-duty trucks are a relatively expensive. But with that said, the company started increasing the dividend again in 2010 and also restored the special dividend.

Today, the forward regular dividend is $1.28 per share annually giving a yield of about 1.9%. This is nothing to write home about. But the company is paying an annual special dividend with excess cash. In 2018, PACCAR paid $2 per share giving it a total dividend of $3.09 per share. The corresponding yield was about $4.7% based on an average stock price of $65.42 per share in 2018. Clearly, this makes PACCAR much more interesting for those seeking income.

From the context of dividend safety, the regular dividend is decently covered. The payout ratio is a healthy 18.9% based on consensus 2019 EPS of $6.77. When including the special dividend, the payout ratio is about 50%, an acceptable value. In 2018, FCF was about $1,039.3M and the total dividend required $804.3M giving a dividend-to-FCF ratio of 77%. This is above my threshold but sill OK. The special dividend is not mandatory and is different each year. So, I am not too concerned about the higher cash flow requirement when including the special dividend. As a truck manufacturer, PACCAR makes use of debt. But short-term debt was only $3.9B and long-term debt was $6.73B, but this was offset by $4.34B in cash, cash equivalents, and short-term investments. The company maintains sufficient liquidity to cover its obligations.

PACCAR is a somewhat riskier investment for a dividend growth and income stock. The medium- and heavy-duty truck market is very cyclical. But saying that, the company remained profitable even during the Great Recession. The forward P/E ratio is about 10.0 compared to a 5-year trailing average of 18.3. So, PACCAR is undervalued based on this metric. But still, I would like a higher regular yield and somewhat greater discount to account for the downside risk. The business cycle is late, and the global economy with emphasis on manufacturing is slowing. Hence, I am in wait and see mode with PACCAR.

CME Group, Inc.

CME Group (CME) operates futures and derivatives exchanges in commodities, metals, energy, foreign currencies, interest rate, options, and equity indexes. The company traces its roots to 1898 and had an IPO in 2002. CME Group has played a role in consolidation of the industry acquiring CBOT Holdings in 2007 and NYMEX Holdings in 2008. Today, the company is a market leader in futures and derivatives trading.

CME Group is a dividend growth stock having raised the dividend for nine consecutive years. The current forward regular payout is $3.00 per share giving a yield of about 1.4%. The regular dividend is well covered with a payout ratio of roughly 44.3% based on consensus 2019 EPS of $6.77. The special dividend, which has been paid consistently since 2012, varies but was $1.75 per share in 2018. This gave a payout of $4.55 in 2018 and yield of about 2.7%, which is respectable but not great. The regular and special dividend are also covered from the perspective of free cash flow. In 2018, FCF was $2.32B and the total dividend required $2.15B. The dividend is not at risk from too much debt as the debt-to-equity ratio is about 0.15 and interest coverage is 14X. Overall, I view the dividend as safe.

CME Group is a company that I would not mind owning at the right price. But at the moment, the stock is overvalued. It is trading at a forward P/E ratio of about 31.1. This is much higher than the broader market average multiple and also the company’s trailing 5-year multiple of about 25.3. This high valuation and comparatively low yield even with the special dividend suggest that one should wait for a better entry point.

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Disclosure: I am/we are long LAZ, MSM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-10-04