When Special Dividends Don’t Deliver (MOS, MOO)

Sometimes special dividends make sense, and sometimes they do not.  Mosaic Co. (NYSE: MOS) traded lower most of the trading day after the fertilizer and potash giant declared a special cash dividend of $1.30 per share.  The company also reaffirmed its 2010 capital spending guidance, but the special dividend failed to excite many investors.  With a prior close of $51.79, that is a 2.5% special return.  Generally speaking, special dividends have a higher return than this.  They also tend to come when an entity feels that it has no better use of its capital.  Yet the reaction today was an unfavorable one, and there are reasons why.

This comes to roughly $580 million cash being deployed.  That in turn compares to a $2.6 billion balance of cash and equivalent securities at the end of August.  The problem is that the return of this cash is one-time despite the CEO saying this is a show its confidence.  Usually, when companies want to show that they drastically increase their quarterly dividends.  These have been $0.05 per quarter, and that comes to a current yield of a mere 0.4% yield.  Even if short-term rates are effectively 0.0% in T-Bills, we would love to find investors who buy stocks because of a 0.4% yield.

Had the company taken its regular dividend up to say 1%, it might have been better received.  The issue is that fertilizer companies have not been the biggest dividend stocks out there.  And now that the market death spiral seems over, it seems that many investors might not even be excited over a 1% dividend.

While the company believes that it leaves more than enough operating capital for 2010, this may signal that the $22+ billion market cap fertilizer and potash player is not going to make any big acquisitions.  Anyhow, we do not bash companies for returning cash to shareholders.  It just seems as though the reaction here may be a “thanks for nothing” from its investor base.  Of course, the US stock market and the appreciation of the US Dollar was part of the reason for today’s sell-off.

Mosaic closed down 3.7% at $49.88 and its 52-week trading range is $21.94 to $131.50.  The Market Vectors Agribusiness ETF (NYSE: MOO), where Mosaic accounts for almost 7% of the weighting of the ETF, closed down ‘only’ 1.4% at $40.14 today.

Jon C. Ogg