BAB Inc. declares a major special dividend

I have written in the past about BAB, Inc, (symbol BABB) which franchises Big Apple Bagel, and My Favorite Muffin restaurants among others. BAB is of interest because it has a low P/E and a high dividend yield which is frequently increased with annual special dividends. This morning, BAB declared the usual 1 cent per share dividend, but it also announced a 4 cent special dividend that will be paid before the end of the year. For a stock selling at 63 cents at the time of the announcement, a 5 cent dividend is enormous.

The special dividend ought to be viewed as a buying opportunity for the stock. A purchase at 63 cents is the equivalent of buying at 58 cents per share and a return of the 5 cent dividend. Some of the dividend may be return of capital, but most of it will be qualified, so it will have favorable tax treatment. A purchase in an IRA or 401K, however, will be the same as buying the stock for 58 cents. After that, the regular 4 cent annual dividend will provide a return of 6.9% which is extremely high for a stock of this sort. BAB is rolling out a new restaurant concept called Sweet Duets; it is a combination of My Favorite Muffin with a frozen yoghurt shop. We do not yet have much in the way of detail with regard to this new concept. Even without the new concept, however, the company ought to earn enough to pay the 4 cent dividend moving forward into the future.

DISCLOSURE: I am long BAB stock.