Last week, I wrote about thedividend surgethat could be around the corner followingGeorge Osbornes overhaul of the way UK dividends are taxed. I concluded that, if historys anything to go by, many companies will rush to announce special dividend payments during the next few months in an attempt to return as much cash to investors before the next tax rules come into force.
Direct Line Insurance(LSE: DLG),Admiral(LSE: ADM) andEsure(LSE: ESUR) are three special dividend candidates. All three are raking in cash, have strong balance sheets, and have a record of returning cash to investors.
Cash machines
Direct Line,Admiral andEsureare all highly cash-generative, which makes them the perfect candidates for special dividends.
For example, Direct Lines first-half results, issued today, really showcased the companys cash generation. While the gross value of premiums written only ticked higher by 0.4% during the first half of the year, operating profit increased 43% to 336m. Moreover, return on tangible equity hit 21.2% for the period, up from the figure of 14.9% as reported in the year-ago period. Group net asset value rose by 16% during the first six months of the year.
But the key figure in Direct Lines earnings release was the companysrisk-based capital coverage ratio, which stood at 155.9% at the end of June. Management is targeting a coverage ratio of 125% to 150%, anything above that level can beconsideredto be excess capital. Management has stated that it will consider returning excess capital to shareholders when it reports full-year results for 2015.
Similarly,Esurehas built up an excess capital buffer that could be returned to investors. Under the Insurance Groups Directive,Esureis required to maintain a capital buffer of 81m to protect itself from sudden shocks and a higher-than-expected level of claims. At the end of 2014,Esurehad 284m of Tier 1 capital. Including other capital resources, the companys capital reserves exceed regulators required minimum by 377%.
Esurecant return all of this capital to investors in one go, but the new dividend tax regime might inspire management to return a large chunk of it. City analysts currently expectEsuresshares to support a regular dividend yield of 5.3% this year and 5.6% during 2016. These figures exclude special payouts.
Out of the threeinsurers, however, Admiral is most likely to issue a hefty special dividend towards the end of the year.
Admirals founder and ex-CEOisstill the companys majorityowner and based onhistoric trends, companies with a high level of insider ownership always announce special dividends before tax changes come into force. Whats more, Admiral is already one of the FTSE 100s dividend champions.
Over the past five years, Admiral has returned a total of 1.1bn to investors via both regular and one-off dividend payouts. This works out as around 90% of Admirals net income generated over the period.
City analysts havepenciledin a dividend yield of 6.0% for Admiral this year and 6.3% during 2016. Once again, these forecasts exclude any special payouts.
Dividend champions
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.