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Goldcorp Special Dividend Is Capital Allocation at Its Finest

Will Ashworth

Newmont Mining (NYSE:NEM), is offering an 88-cent special dividend to Newmont shareholders to close its $10 billion acquisition of Goldcorp (NYSE:GG). Owners of GG stock should be happy about Newmont’s capital allocation decision.

Goldcorp Special Dividend Is Capital Allocation at Its Finest

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On the ten-yard line, Newmont had to do something to convince prominent shareholders, such as John Paulson, that the deal to buy Goldcorp was a good one.

Newmont initially offered Goldcorp shareholders .328 shares of NEM stock in mid-January for every share of GG stock held, along with 2 cents in cash per share. Newmont trotted out the natural synergies explanation as to why the deal made sense — $365 million in annual pre-tax synergies while delivering 6-7 million ounces of gold annually within a decade — but Newmont shareholders felt the deal unfairly benefited Goldcorp shareholders.

On March 25, VanEck portfolio manager Joe Foster, who oversees the VanEck precious metals investment team, changed his mind about the merger vote. VanEck, Newmont’s third-largest shareholder, had serious concerns about the deal. The special dividend has removed any such concerns.

“As things stand right now I plan to vote in favor of the Newmont deal,” Foster said in an interview. While Paulson is still reviewing the special dividend, it’s likely that he’ll also fall in line and vote for the deal.

Ratification is expected April 4.

“From my standpoint, I think we’ve done what we needed to do,” Newmont Chief Executive Officer Gary Goldberg said in an interview. “It now is up to our shareholders. I’m really looking forward to positive results out of both votes.’’

While the special dividend will only be paid on the successful consummation of the $10 billion deal, it illustrates why more companies should utilize this capital allocation lever ahead of customary shareholder rewards such as regular dividends and share repurchases.

Here’s why.

Greater Flexibility to Handle All Economic Conditions

In April 2016, I highlighted four stocks that had paid one or more special dividends in the past year, that I thought were good investments. My argument was relatively straightforward.

“In my opinion, special dividends are one of the best examples of efficient capital allocation because it shows me that management understands the ebb and flow of its own cash flows and is more than willing to reward shareholders when the coffers are flush and to hold back when they’re not,” I wrote on May 3, 2016.

“But I wasn’t just looking for stocks to buy that paid a special dividend — I was after those that don’t pay a regular dividend and have no formal dividend policy.”

Here’s how the four stocks have performed in the 35 months since.

Stock Performance Amerco (NASDAQ:UHAL) 4.0% Diamond Hill Investment Group (NASDAQ:DHIL) -12.3% Under Armour (NYSE:UAA) -52.3% Facebook (NASDAQ:FB) 42.4% SPDR S&P 500 ETF (NYSE:SPY) 44.1%

So, what happened? Why such terrible performance relative to the index?

Well, each of the businesses has had different issues to deal with: Amerco (rising costs), Diamond Hill (increased competition), Under Armour (bad management) and Facebook (privacy issues).

These are hardly my best stock selections over the past three years. However, I do believe that all four are company-specific problems rather than asset allocation mistakes. Long-term, all of these stocks should make investors money.

But I digress.

Newmont’s Capital Allocation Winning Choice

Over the past three fiscal years, Newmont generated $2.9 billion in free cash flow. From that, it’s paid out $648 million in dividends, repurchased just $98 million of its stock, and repaid $1.7 billion of its debt, leaving it with plenty of cash for other potential uses.

The 88-cent special dividend will cost the company $469 million. However, the combination of it and Goldcorp should produce at least $1 billion in annual free cash flow — probably more if it achieves the projected cost synergies of $365 million annually.

Without the special dividend available to it, there’s almost no way Newmont could have achieved a successful vote. That’s because it would have had to reduce the number of shares it issued Goldcorp shareholders (less than 0.3280) to pay for the deal. Goldcorp shareholders likely would have vetoed such a plan.

Newmont was a rock in a hard place.

I don’t know why companies don’t utilize the special dividend more often. It provides greater financial flexibility so that management can do what’s right for all stakeholders, including shareholders, without locking the company into quarterly rent checks that become a noose around its neck.

The argument against special dividends is that it benefits Johnny-come-lately shareholders at the expense of long-time shareholders, who didn’t buy on the news. There’s a measure of truth to that.

However, in the long run, I believe the pros outweigh the cons. If you’re Joe Foster at VanEck, you see the benefits.    

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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