How to spot a potential special dividend stock

These 7 companies are prime candidates to announce payouts before year's end.

By TheStockAdvisors Sep 25, 2012 12:50PM
Financial Stock Chart copyright Kick Images, Photodisc, Getty ImagesBy Jim Fink, Investing Daily

During the last three months of 2010 -- the last time the Bush tax cuts were set to expire -- more than 150 companies announced special dividends. 

To guard against a rise in tax rates now, several companies are likely to announce special dividends during the last months of 2012 to take advantage of the current 15% rate. 

Why is this important? After all, don't stock prices fall by the amount of any dividend payout? Yes, that is true -- on the ex-dividend date.

But there is evidence that investors bid up the price of a stock significantly between the date a special dividend is announced and the ex-dividend date.

Bottom line: Special dividends can create trading opportunities! The key is to buy the stock before the special-dividend announcement and that is why the list of stock candidates below should be of interest to investors.

Since corporate executives don't always have the average shareholder's financial interest as a top priority (unfortunately), I believe a company is more likely to issue a special dividend if corporate insiders own a large chunk of company stock and would personally benefit from the dividend payout.

The company must also generate enough cash to pay a large dividend and not be burdened by a lot of debt. Consequently, I screened for stocks where:
  1. Insiders own at least 30% of shares outstanding
  2. Free cash flow is greater than 10% of the stock’s market cap
  3. Debt-to-capital ratio is less than 30%
The stock screen came up with seven stocks. These companies are prime candidates for special dividend announcements between now and the end of 2012:
  • NCI Inc. (NCIT), which is involved in cybersecurity software.
  • GameStop (GME), the video game retailer.
  • ManTech International (MANT), which is involved in electronic warfare.
  • Nasdaq OMX Group (NDAQ), the securities exchange operator.
  • Molina Healthcare (MOH), which provides Medicaid insurance plans.
  • Legg Mason (LM), a money management firm.
  • Cross Country Healthcare (CCRN), a healthcare staffing and outsourcing company.
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