Income investors love the money they get from dividend-paying stocks. For most investors, the more dividends they get, the happier they are about it.
Most dividend stocks make predictable regular payments of income, often on a quarterly basis. But every so often, some stocks make truly massive dividend payments that can provide a nice windfall for investors. These special dividends can play a major role in making a stock attractive for long-term shareholders, and in some cases, they can be truly massive. Recently, one stock made the biggest dividend payment I’ve ever seen — more than $100 per share! — as part of a broader strategic plan to make a bigger splash in its industry.
Turning drinks into dividends
In January 2018, beverage company Dr Pepper Snapple got an interesting, unexpected offer. Keurig Green Mountain, which had previously been a publicly traded company but which went private in a buyout led by private equity investor JAB Holding Company in 2016, offered to merge with Dr Pepper Snapple. Under the terms of the deal, the surviving entity would be called Keurig Dr Pepper (NYSE: KDP) and combine the cold-beverage sodas and still drinks of Dr Pepper, Snapple, and their other brands with the coffee specialist’s prowess in both home-brewing and retail partnership operations.
What was particularly unusual about the deal was its structure. JAB and Keurig didn’t offer to buy existing shares of Dr Pepper Snapple from shareholders. Instead, they proposed making an equity investment of $9 billion in Dr Pepper Snapple. But that wouldn’t have been enough to give Keurig the commanding stake in the combined company that it wanted, so in addition, the merger agreement called for Dr Pepper Snapple investors to get a special dividend.
The size of that special dividend was impressive. With shares having traded at around $95 per share prior to the buyout announcement, Keurig proposed paying Dr Pepper shareholders a whopping $103.75 per share as a dividend. That added up to almost $19 billion in dividend payments to owners of the stock. By the time the deal went through, the share price had risen to almost $125, making the special dividend payout more than 80% of the value of the stock.
What goes up must come down
What followed the special dividend payment is something that every dividend investor needs to understand: The stock price plunged. In fact, it plunged by roughly the same amount as the $103.75 per share special dividend. Now you can buy stock in Keurig Dr Pepper for less than $23 per share.
The strategy for structuring the deal the way that Keurig did was ingenious. JAB and Keurig’s other shareholders were probably ready for Keurig to come public again in order to get a payoff on their initial investment. Yet rather than going to the expense of doing an IPO of Keurig by itself, the merger with already publicly traded Dr Pepper Snapple allowed the private equity investors to translate their stake in privately held Keurig into an equivalent publicly traded stake in the combined company. Keurig investors got their liquidity, and Dr Pepper shareholders got their payday.
Going forward, dividend investors will still be pretty happy with Keurig Dr Pepper. The drink giant has said that it will pay roughly $0.60 per share in annual dividends going forward, giving shareholders a nearly 3% dividend yield. That’s not exactly 80%, but it shows Keurig Dr Pepper’s ongoing commitment to returning capital to its investors through dividends.
Special cash dividends can be huge, and they can also serve a number of different purposes. It’s always worth keeping your eyes open when a stock you own declares a special dividend, because it can represent a big inflow of cash that you’ll need to decide how to reinvest. Whether you put that money back into additional shares of that stock or use it to pay living expenses, special dividends can provide a healthy chunk of liquidity to give you more flexibility in your financial decision making than you typically have with regular dividends.
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