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When is a special dividend not that special?

More and more companies are paying a special dividend nowadays, but critics argue that they aren’t always a sign of a healthy, growing company

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FTSE 100 companies paid out £6bn in special dividends last year

Motor insurer Sabre Insurance PLC (LON:SBRE) wheeled out a special dividend alongside its full-year results earlier today.

The FTSE 250 company, which owns brands such as Go Girl and Insure 2 Drive, said it would pay investors an extra 6p per share on top of what it had already set aside.

READ: Sabre declares special dividend despite profit fall

Sabre is only required by regulators to keep £61mln in case of emergency, but it ended 2018 with £130mln, so it wanted to return some of this excess cash to shareholders.

Making these one-off payments to investors is a growing trend among London’s biggest companies.

Last year, for example, 12 firms on the FTSE 100 paid out special dividends worth some £6bn – the highest amount ever.

“That tidy sum topped up the £87.2bn paid out in regular dividends and added 0.3 percentage points to the UK’s dividend yield, a welcome addition to portfolio returns for income-seekers and one that will have put more of a gloss on the FTSE 100’s disappointing capital return in 2018,” says AJ Bell investment director Russ Mould.

In addition to Sabre, mining giant BHP and UK bank RBS have also unveiled special dividends of their own, and Mould speculates that others may well follow suit in the coming weeks and months.

Used to win over unhappy investors

While the extra money is no doubt a boon for shareholders, some are critical of special dividends and the companies who pay them.

Take Marks & Spencer Group PLC (LON:MKS), for example. The high street stalwart paid out a 4.2p-per-share special in the summer of 2016 in what was seen by many as an attempt to curry favour with disgruntled investors rather than a desire to return excess profits.

“[That] now looks like a waste of money,” says Mould, “especially in light of the cut to the regular dividend for the year to March 2019 now promised by chairman Archie Norman and chief executive Steve Rowe.”

Some companies have even built up little streaks of special distributions, notably a handful of insurers and housebuilders.

Cancel special > cutting original

That creates a sense of security, but because of their inherently uncertain nature, they can catch investors out when they are pulled.

Direct Line Insurance Group PLC (LON:DLG) halved its special divi last year, while Next PLC (LON:NXT) didn’t pay anything at all despite handing over almost 600p-a-share between 2014 and 2017. ITV  PLC (LON:ITV) hasn’t made a special distribution for the past two years, even though it made four in a row between 2013 and 2016.

Mould reckons housebuilders could be among the next to pull their specials if the Help to Buy scheme, dubbed Help to Profit by some critics, is refined

That fits in with one of the key reasons why a company might opt to bring in a special dividend rather than increase its original pay-out.

“It is easier to decline to pay a special dividend than it is to cut a regular one,” explains Mould.

If the companies were that confident of their future performance, surely they would just hike their regular dividend?

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