Thursday, 12 February 2015

Another Quarter, Another Hefty Special Dividend from Lancashire Holdings

The strong cash performance of the speciality insurer and reinsurer, Lancashire Holdings, continued with their announcement of the Final results.

As a consequence, again Lancashire announced the usual $0.10 Final dividend with another hefty Special Dividend of $0.50.

Lancashire has form in this regard with it regularly providing investors with significant cash returns through--chiefly--Special as opposed to Ordinary dividends. As I noted when I first bought into the company back in November 2014 they have engaged in this slightly unorthodox practice for many years.

The current cash return (ordinary and special dividends combined) according to Lancashire should return about 39p per share in April. That represents--in itself alone--a yield on my purchase price of about 6%.

That is, by any measure, a staggering return. What is more, this means that in addition to the Special Dividend announced in the Q3 results and paid in December which in itself threw out a yield on cost of 11% I will have had returned 17% of my capital invested in Lancashire returned to me after just 6 months holding the stock.

Such is the remarkable return for Lancashire I thought I would spend a little time dwelling on this.

Not so "Special" Dividends?

Of course, Special Dividends are not consistently paid. But, nonetheless, the regularity and value with which Lancashire announces these returns means at times they have the feel of ordinary dividends.

Its ordinary dividend has been static for some years (at least 2009) at $0.15 per share. However, throughout that time it has returned significant capital through Special Dividends as we can see when we strip out the ordinary dividends since 2008:

  • 19 December 2014--$1.20 (£0.7641) was paid.
  • 16 April 2014--$0.20 (£0.1218) was paid. 
  • 20 December 2013--$0.45 (£0.2754) was paid. 
  • 17 April 2013--$1.05 (£0.6905) was paid. 
  • 19 December 2012--$0.90 (£0.5605) was paid. 
  • 21 December 2011--$0.80 (£0.5165) was paid. 
  • 19 January 2011--$1.40 (£0.8856) was paid. 
  • 6 January 2010--$1.25 (£0.7562)was paid. 
  • 25 January 2008--$1.10 (£0.5622) was paid.

It is obvious that during more straightened times the Special Dividends were not as frequent (i.e. between 2008 and 2010). However, bearing in mind that the ordinary dividends were still being produced during this time it is clear that Lancashire still represents a solid income stock without the Special Dividends being forthcoming.

Very Special Dividends

However, just because their regularity may seem to be diminishing the value of the word "special" it does not mean that they are not still very much special dividends. Here is a quick example.

If you had bought just 155 shares at 320p each (about £500) of the stock in November 2007 you would have seen over £795 in special dividends alone hitting your broker account since then.

This, bear in mind, is not including either the ordinary dividends or if you had repurchased shares with each Special (or indeed ordinary) Dividend. This is staggering. Imagine if you did reinvest and include ordinary dividends (which would have contributed about £85 more in income over this period)!

Even if we assumed that you had paid in November 2007 the price I paid for the company (about 664p per share) in November 2014 and only got 78 shares for my £500 investment I would have been sitting on a £400 return from Special Dividends alone. Again this is without ordinary dividend payments and dividend reinvestments.

It is thus little wonder that the highly regarded British investor, Neil Woodford, holds Lancashire in his income portfolio.

Can they be any more Shareholder Friendly?

Yes, as it happens.

As if the company was not being generous enough to its shareholders already, Lancashire also add value for them through it share repurchase programme instigated after the AGM vote early last year. Here is what the results stated:

$16.6 million of shares were repurchased during the fourth quarter of 2014 compared to $nil in the same period in the prior year. The total value of shares repurchased during the year ended 31 December 2014 was $25.0 million compared to $nil in the year ended 31 December 2013. The Repurchase Program is subject to renewal at the 2015 AGM in an amount up to 10% of the Company's then issued common share capital.

Overall, the more I learn about Lancashire, its business and management the more impressed I become by it. In recent months its share price has been a little depressed. However, since today's announcement it has rocketed up about 4.5%.

I will, I think, be looking for a new opportunity to increase my holding in the company but may wait until the payment of this new dividend when I suspect the price will again drop significantly.

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