In a recent report, Morgan Stanley analysts shed light on a fascinating strategy for investors looking to tap into hidden income potential in the stock market. According to Todd Castagno, a strategist at Morgan Stanley, special dividends could be the key to unlocking an appealing combination of unexpected income and price appreciation. These one-time payments, made by companies outside of their regular dividend cycle, have shown a remarkable ability to boost share prices in the months following their announcement.
The data presented by Morgan Stanley is compelling – companies that have distributed special dividends have seen their share prices outperform the market by 4.1% in the six months following the announcement. This outperformance grows to an impressive 7.8% in the 12 months following the news. The rationale behind these nonrecurring dividends varies, from excess cash distribution to capital restructuring. However, one thing is clear – special dividends have the potential to signal optimism and confidence in a company’s future prospects.
Morgan Stanley’s team has identified a group of “special dividend hopefuls” – companies that not only have the ability to offer these one-time payments but also maintain a net cash position as a proportion of market capitalization above 1%. Among the companies highlighted are Alphabet, Paychex, and EOG Resources.
Alphabet, for instance, recently authorized its first dividend of 20 cents per share, in addition to a $70 billion share repurchase. The tech giant’s shares have soared by more than 30% this year, with a modest dividend yield of 0.4%. With its leadership in artificial intelligence and strong analyst recommendations, Alphabet is poised for further growth.
Paychex, a payroll provider, has also been identified as a potential special dividend payer. While the company currently offers a dividend yield of 3.1%, its shares have seen a modest 5% increase in 2024. With an upcoming earnings report and a recent dividend hike, Paychex could be a company to watch for income-oriented investors.
EOG Resources, an energy stock, rounds out the list of special dividend hopefuls. With a dividend yield of 2.9% and a positive outlook from analysts, EOG Resources is seen as undervalued for its drilling locations and potential for growth. Bank of America analyst Kalei Akamine has even reinstated coverage of EOG with a price target suggesting over 20% upside from current levels.
Special dividends present a unique opportunity for investors seeking both income and price appreciation in the stock market. By identifying companies that have the potential to offer these one-time payments, investors can uncover hidden income potential that may not be immediately apparent. With the guidance of research from firms like Morgan Stanley, investors can strategically position themselves to take advantage of these special dividend opportunities and potentially see their portfolios flourish in the months to come.