Why these AIM dividend payers are special

Cash-rich AIM companies are increasingly rewarding shareholders with special dividends. There may be no immediate need in the business for the cash, so companies decide to return it to shareholders. Sometimes there has been a disposal which leaves a company cash rich, other times the money has been built up via cash generation from trading.

The old cliché is that it is rare for an AIM company to pay dividends, but this perception is mainly down to the large number of resource companies, where there are very few that generate cash, let alone that are dividend payers.

The majority of AIM companies do not pay dividends, but there are still plenty that have been - many for more than a decade.

Even so, many highly cash generative companies that have consistently paid dividends still have spare cash. This could be used to buy back shares, but in some cases AIM companies have limited liquidity and buying back shares, while financially sensible, could further reduce liquidity.

Despite this, some companies do combine special dividends and share buybacks.

Consistent payers

Floorcoverings manufacturer James Halstead has been a strongly cash generative company and, even though it has increased its dividend for 41 years in a row, it has still had spare cash to pay special dividends every few years.

The latest total dividend increased from 11p to 12p a share. The dividend equates to nearly £25 million in cash terms, compared with last year's operating cash inflow of £40 million.

The most recent special dividend - not included in the above payout - of 7.858p a share was paid in February 2016. Net cash was still £44.1 million at the end of June 2016, so there is more scope for special dividends and/or share buy backs over the next few years.

Call centre software supplier Netcall is paying what it describes as an enhanced dividend. This is effectively a special dividend by another name.

Unless the board decides to further cut the cash pile, the dividend will go back to normal levelsThe total dividend for 2015-16 was 3p a share, but that was made up of 1.1p a share of normal dividend and 1.9p a share of enhanced dividend.

The previous year's dividend was 1p a share plus 1.2p a share of enhanced dividend - the first year the supplement was paid.

Netcall had been building up its cash balance and it made a decision in September 2015 to pay enhanced dividends until the cash pile settled at around £10 million. This will still provide funds for potential acquisitions.

There was £14.1 million in the bank at the end of June 2016, so there is scope for at least one more year of enhanced distributions. Each 1p a share dividend costs £1.4 million.

What should be remembered is that, unless the board decides to further reduce the cash pile, the dividend will go back to normal levels. The dividends are not covered by earnings and at some point this has to change.

This means that the current 5% yield is not sustainable for more than a couple more years.

Potential for more

Some companies have potential to pay more special dividends if not each year then every few years.

In my previous article on dividends in October I mentioned infection and contamination control products supplier Tristel and market research products and services provider BrainJuicer under the heading of growth and special dividends.

Tristel has risen by around 14% since then and BrainJuicer is trading at a similar price. These two companies remain attractive investments with the potential for more special dividends.

Email marketing services provider DotDigital is an example of a cash generative business with strong recurring revenues that has built up a cash pile, even though it has invested to grow the business.

The yield is currently modest, but there is potential for regular special dividendsAcquisition opportunities are limited, with organic growth in existing and new geographies making better sense.

A modest and growing dividend has been paid in recent years and this year a decision was taken to pay a special dividend of 0.43p a share this year, which is on top of the ordinary dividend of 0.41p a share.

Cash continues to increase and it was £17.3 million at the end of June 2016. The yield is currently modest, but there is potential for regular special dividends without making much of a dent in the cash pile.

Disposal proceeds

Sometimes a large disposal can leave a company with spare cash, or it may be part of a plan to sell off each part of the group and return the cash to shareholders.

For example, Bond International Software has been selling off its businesses and would have returned the cash to shareholders if it had not been taken over.

Just this month, PCI-PAL shares have gone ex-dividend for a £1 million return of cash to shareholders, after the disposal of the IPPlus and CallScripter call centre-related businesses in order to concentrate on secure payments products and services. PCI-PAL had £4.8 million after the disposals and property sales.

Empyrean Energy has returned 7.9p a share (£17.5 million) following the sale of its stake in the Sugarloaf oil and gas prospect. However, technically this was not a dividend, but an issue of "B" shares which were immediately redeemed for cash.

These three companies have raised money through disposals and are likely to pay some or all of that cash to shareholders.

Electric Word

Sports information publisher Electric Word has just completed the sale of educational and therapists books supplier Speechmark Publishing for £1.85 million, although £185,000 is deferred for 12 months.

This follows the sale of Optimus Professional Publishing for £1.51 million and completes the disposal of the education division, turning the focus to sports-related publishing and consultancy activities.

Electric Word is unlikely to need all that cash, so there could be a significant special dividendThe education division was losing money and Electric Word is left with a profitable ongoing business, but overheads will need to be cut.

There was already £11.5 million of net cash in the balance sheet at the end of May 2016. This mainly came from the disposal of the company's stake in iGaming Business.

The current share price is 3.5p (3.25p/3.75p) and pro forma cash after the disposals is around 3.5p a share.

There may be some restructuring costs that will reduce the cash pile, but there is a business left that is valued at virtually nothing. Electric Word is unlikely to need all that cash, so there could be a significant special dividend.

Trinity Capital

Trinity Capital has made a number of distributions out of disposal proceeds and it has just announced its latest special dividend of 5p a share, which will distribute £10.5 million of cash.

The ex-dividend date is 1 December and the payment date is 16 December. The share price has already risen to 6.25p (5.5p/7p).

Trinity has sold investments, valued in its books at £5.1 million, for £8.7 million and it already had cash of £5.66 million in the bank at the end of March 2016, when the net asset value (NAV) was £11.6 million.

The price is underpinned by assets, with provisions for legal costs potentially to be cutAdding the gain on the latest disposal and taking off the distribution that makes a pro-forma NAV of £4.7 million. That is equivalent to 2.2p a share.

There was also a £2 million provision for future legal costs in the balance sheet, but in the latest statement Trinity said that "Immobilien Funds and TCML (Trinity Capital Mauritius Ltd) will now proceed and co-operate to discontinue all pending legal proceedings in Mauritius".

This leaves one other legal dispute, so some of the provision may not be needed.

Trinity Ten Capital Ltd (TC-10) is the remaining investment and the final value for the business will depend on what price is obtained when it is sold and any currency movements.

Even so, the current price is underpinned by assets with the potential for the reduction of the provision for legal costs. No firm decision has been made on the future of Trinity, but it could become a shell.

Ensor Holdings

Building materials and products supplier Ensor has decided to sell off parts of the group and it will eventually return cash to shareholders via liquidation.

Today, Ensor has announced its intention to leave AIM and it is asking for shareholder approval on 21 December. This will save money. The share price has slumped to 55p (50p/60p) on the news, but this could provide a buying opportunity, particularly if it falls further.

The NAV was £17.5 million at the end of July 2016, including cash of £10.8 million, which valued Ensor at 58.5p a share - prior to the dividend payment of 1.55p a share. Disposals, so far, have produced a surplus on NAV.

There are two profitable subsidiaries left - electric door drives manufacturer Ellard and Wood's Packaging - plus surplus land in Brackley with potential to make more than book value. Talks are already advanced for the sale of Ellard.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.