Friday, Dec 20th 2019

Transdigm's Gift to Investors: Another Massive Special Dividend


About a week ago, we uncovered some interesting insider buying activity from a Transdigm c-suite executive who had increased her personal stake in the company by ~150%.

At the time, our takeaway was that "when [management spends] their own cash to buy more stock than their compensation plan already gives them, that tends to be a notable event and a high sign of internal conviction."

Today, a little more light was shone on the potential source of that conviction.

After announcing the completion of the sale of its connections business Souriau-Sunbank, Transdigm declared a special cash dividend of $32.50 per share - equivalent to an incredible ~5.7% dividend yield on the prior day's close.

You may recall this is actually the second special dividend Transdigm announced this year, coming in hot on the tails of the $30 special dividend (at an implied ~6.5% yield vs. prior day close) that was paid out in August.

Including these dividends, Transdigm has now offered its shareholders a ~92% total return YTD, with its two special dividends contributing approximately ~18%.

While TDG does not pay a regular quarterly dividend, its management team have always been very astute capital allocators, and historically have paid large dividends like these to optimize the company's capital structure.

In layman's terms, what this means is management always keeps its shareholders in mind when it chooses how it invests and raises money.

Transdigm always seeks to finance itself with the cheapest source of funds and deploy those funds in the highest-ROI channels available, irrespective of whether they are internal investments, acquisitions, dividends, or share buybacks.

Although this may seem like an obvious guiding principle, seeing it executed so well in practice is far rarer than you might imagine and hope for, and has thus far been a major leg of the hedge fund long thesis in Transdigm.

As of this writing, TDG was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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