A select group of stocks might be primed to offer investors an appealing combination of unexpected income and price appreciation, according to Morgan Stanley. Special dividends — one-time payments companies make to shareholders outside of their regular dividend cycle — tend to result in higher share prices, according to Todd Castagno, a strategist at Morgan Stanley. There are a range of drivers behind these nonrecurring dividends, including the distribution of excess cash or a change to a company’s capital structure. Earlier this month, Six Flags announced a special dividend of $1.53 per share, payable on July 1, the same day it is expected to close its merger with Cedar Fair. “Committing to a consistent, ordinary dividend sends a positive signal to the market, conveys management’s confidence in the business, and opens the stock to income-oriented investors, while special dividends are a bonus — implying optimism attributable to M & A synergies, secular tailwinds, and/or an extraordinary series of events,” Castagno wrote in a June 14 report. Indeed, companies that have distributed these special dividends have seen their share price beat the market by 4.1% in the six months following the announcement, Morgan Stanley found. That outperformance grows to 7.8% in the 12 months after the special dividend news. To that effect, Castagno’s team highlighted a group of “special dividend hopefuls” — companies that seem to have the ability to offer these one-time payments. They currently pay ordinary dividends and have a net cash position as a proportion of market cap above 1%. Alphabet made Morgan Stanley’s list. Earlier this year, the tech giant authorized its first dividend of 20 cents per share, along with a $70 billion share repurchase. The Google parent’s shares are up more than 30% this year, and they offer a modest dividend yield of 0.4%. On June 12, Morgan Stanley analyst Brian Nowak highlighted the company as a leader in artificial intelligence, noting Alphabet’s “improved multi-modal model capabilities” and its “integrations into search and the smartphone ecosystem.” The stock is also beloved by Wall Street, with 45 out of the 54 analysts covering Alphabet rating it a buy or strong buy, per LSEG. Payroll provider Paychex was also on Morgan Stanley’s list of potential special dividend payers. The company currently offers a dividend yield of 3.1%, though shares are up a modest 5% in 2024. Paychex is expected to report its fiscal fourth-quarter results on Wednesday. Just last month, it announced a 10% dividend hike to 98 cents a share. Nevertheless, Wall Street is largely lukewarm on the name, with 16 out of 20 analysts covering the stock rating it a hold, according to LSEG. EOG Resources was another name that made the cut. The energy stock offers a dividend yield of 2.9%, and it is up 3% in 2024. Bank of America analyst Kalei Akamine this month reinstated coverage of EOG with a price target of $151, suggesting more than 20% upside from Monday’s close. “In our view, EOG is undervalued for its deep inventory of drilling locations and compressing multiple,” the analyst wrote on June 14. In all, 17 of the 32 analysts covering the stock deem it a buy or strong buy, according to LSEG.
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