Markets have been having a pretty rough go of it the past week or so, as fears of the “fiscal cliff” sending the country into the recession have started to sink in. I’m not sure why, but it seems to me that the market has been especially tough on micro-cap companies… of course, maybe I only say that because my portfolio has taken a mini-beating!
But I think one thing investors are missing (for the most part) in this “fiscal cliff” drama is that it’s actually serving as a catalyst for companies with tons of excess cash to pay out special dividends and return that cash to shareholders before tax rates rise.
As a side note, I talked yesterday about the importance of having catalysts in the face of volatile and somewhat expensive markets, but it’s funny to me that the very thing that is making market’ volatile could also serve as a catalyst for unlocking value!
Anyway, just last night, I saw two microcaps I follow (CRWS (very old write up, I know!) and EVI) announce large special dividends, and we saw another (more recently mentioned) special dividend in TSRI a few weeks back.
The big question is, of course, who’s next. It’s really tough to speculate, but I would look for companies with big insider ownership and tons of excess cash. If they have a history of dividend payments, even better.
The two that really come to my mind as likely to pay out special divs are George Risk (RSKIA) and MPAD. Both have tons of excess cash (>50% of current market cap), high insider ownership, and a history of dividend payments. Plus, their underlying businesses are profitable and management seems to have hinted in their filings that the next year or two look very strong (RSKIA through price raising, MPAD through a large increase in backlog).
One that comes to mind as a company unlikely to return cash to shareholders despite a large excess cash balance is recently mentioned Surge Components (SPRS). Despite high excess cash, insider ownership is relatively low compared to executive officers salaries, and the business seems to be getting weaker, not stronger, as margins have slipped pretty drastically this year.
Of course, the future is a mystery, and it’s more likely that most companies don’t pay out all that cash in special dividends. Still, this is an interesting (if temporary) catalyst, and it only serves to make profitable, cash rich, high insider ownership companies look even more attractive.
Disclosure- long SPRS, RSKIA, MPAD, TSRI. Have some limit orders to buy more.
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I wouldn’t be surprised to see a lot of these taken private too especially where mgmt owns a ton of shares since on the take private transaction they’ll owe taxes and with likely future increases in cap gains taxes would be in their best interest to take them private sooner rather than later. It’s only going to become more expensive and cumbersome to be a public company too.