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This stock is paying a 9% special dividend. Here’s why I’d buy

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·3-min read
One pound coin
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We’d all love to double our money on an investment in five years, wouldn’t we? That’s pretty much what Melrose (LSE: MRO) has just achieved after disposing of Nortek Air Management for £2.62bn. Approximately £730m will be returned to shareholders as the equivalent of a 15p special dividend. That’s a yield of 9.5% on Monday’s closing price of 158p.

The company said: “The disposal proceeds, plus more than £700 million of cash generated by the Nortek businesses under our ownership and the retention of the Ergotron and Nortek Control businesses in the group, means we are well-placed to achieve the targeted doubling of shareholders’ investment on the Nortek acquisition.

Melrose has also earmarked some of the cash for lowering its GKN pension shortfall. And it will use some to reduce debt. Melrose reckons that will get net debt down to less than 2x EBITDA at 30 June. So it’s not just the effective dividend I like here (paid as a new share issue, redeemed for cash). No, I’m seeing the company using this disposal to get itself into a stronger position all round.

Morrisons takeover boost

Morrisons made takeover news this week too, with a tentative approach from US private equity firm Clayton, Dubilier & Rice (CD&R) at 230p per share. By market close on Monday, the Morrisons share price had climbed 34% to reach 240p, 10p above the mooted CD&R offer.

The board quickly rejected the approach. And it seems investors expect any successful bid will need to be better. So will we see higher offers, perhaps from other interested parties? CD&R has until 17 July to decide what to do. But which do I like the look of best, a quick profit from Morrisons, or long-term disposal dividends from Melrose?

If I owned Morrisons shares I’d probably sell and take that fat profit. And cashing out would be especially attractive when the company isn’t my favourite in the sector. In the supermarket business, that’s still Tesco.

Tesco has been on my buy list for some time, but every time I’m ready for a purchase something else takes the top spot. Still, if Tesco makes it to the head of my list, I’ll be buying with a view to holding for 10 years or more and reinvesting the dividend. I wouldn’t be looking for a quick sale.

A future dividend

Anyway, back to Melrose. The company buys up struggling manufacturing companies and turns them round for resale. The highest profile acquisition in recent years was GKN, for £8bn in 2018. The buyout of one of the UK’s oldest engineering companies was controversial, and I expect it’ll be a few years yet before it’s ready for resale. But when that happens, I predict another bumper dividend day. And I aim to be holding Melrose shares to get some of it.

The downside risk is that we’ll have to face a few years of little or no profits now. Oh, or that the planned GKN turnaround will be a flop. But on the whole, Melrose is my preferred way to play the acquisition game.

The post This stock is paying a 9% special dividend. Here’s why I’d buy appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose, Morrisons, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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