Dividend vs. "Special" Dividend... There has been much discussion as to whether or not a dividend should be paid to Surge shareholders in the near future. Some have been screaming for a dividend while others have indicated that they would prefer that the debt be paid down substantially or even totally, before the institution of a dividend, which may or may not be sustainable.
Many of you would prefer that Surge pay a dividend because it would offer the benefit of adding to your regular income stream and/or it would boost confidence in Surge... you would continue to hold your position and it would hopefully attract new investors and thus boost the share price.
We are all aware that the price of oil, at its current price, bodes very well for Surge as it continues to add to its treasure chest of excess cash. When a company finds that it has a large amount of excess cash, it often decides to distribute that cash to its shareholders through a regular quarterly dividend OR a one-time payment of a "special" dividend that could actually be repeated if the company continues to have an abundance of cash.
Everything I read lately tells me that we are in for about 5 years of present day or an even higher price for oil. Given this scenario, I'm wondering if it would be more beneficial to both Surge and its shareholders to institute a "special" dividend. This "SD" could be declared as long as Surge has a strong balance sheet and is experiencing a windfall of FCF from high oil prices. That allows Surge to return cash to its shareholdes without the constraint of a regular payment and it still maintains the ability to meet debt payments and other obligations, as well as to invest in the future.
Yes, I know there are drawbacks to the "SD"... the stock will be immediately reduced by the amount of that payment, but I have been the recipiant of many "SD" over the years and the initial reduction is always gained back fairly quickly. The key, of course, is to not sell your shares... if you do, you would be essentially wiping out your own profits by taking a hit on the price of your shares. And of course, the more investors who sell immediately following the "SD", the more SGY's share price is likely to drop.
Some of you will regard the "SD" as a sign that Surge has run out of opportunities to expand its growth. I agree that there should be ways to invest excess cash whether through acquisitions or new capital investments but it seems from all indications that the growth wedge for Surge will remain in the vicinity of ~2.5%, with a maximum of 5%. Most likely, this is due to the fact that it has ~14 years of inventory and ~2.6B barrels of oil in place.
Probably, one of the biggest negating factors for shareholders is the tax issue once the "SD" reaches your account. For me personally, this is not an issue since I have been able to push all my stock holdings into my and my wife's TFSAs... the greatest thing since sliced bread, lol.
I do realize that it could be better for Surge to buy back shares, than issue a "SD". Our ownership stake in SGY would go up and its stock price should go up as well. You could then choose how and when to sell your shares to raise cash if you want and/or control your tax rate at the same time.
As I mentioned above, the share price will fall by the amount of the "SD", when it is paid. If you are not aware, this is because the value of the cash is no longer included in the intrinsic value of Surge's shares. But, if we believe that the price of oil is going to remain high for the foreseeable future, SGY's price will return to its previous level in minimal time.
Over the long term, with a reputation of paying a special dividend, Surge should trade for a premium over its peers that don't. This is because income investors hungry for cash will figure out there is a "SD" to gain and bid up the price of Surge by buying shares. If PC and management are effective at communicating what the capital plan is and why the "SD" is being issued, then SGY should do fine over the long term.
My apologies for the lengthy post... couldn't stop once I got going, lol. Btw, this is just food for thought... I'm not about to debate with anyone! Cheers everyone... have a great weekend!!