As part of its third quarter earnings announcement August 7, Spectrum Brands (NYSE:SPB) announced it was paying a $1 special dividend on September 18. In addition, it was initiating a regular quarterly dividend of 25 cents starting in fiscal 2013. Whenever a special dividend is paid, it's good news for sure. The question for investors at this point is whether it's better to be a Spectrum Brands shareholder or an owner of Harbinger Group (NYSE:HRG), its controlling shareholder. Let's have a look.

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Income Investors
As I said in the opening paragraph, the Spectrum Brands special dividend was paid September 18. For arguments sake, let's assume that you held both stocks as of the August 23 ex-dividend date. Based on the $1 dividend, you're looking at a one-time hypothetical yield of 2.4% as of the September 18 closing price of $41.03. Moving forward into 2013, the ongoing quarterly dividend also translates into a 2.4% yield. Harbinger, which owns 57.1% of Spectrum, and is the controlling shareholder, will receive $29.5 million from the special dividend and approximately the same amount in 2013 and beyond.

Like Berkshire Hathaway, Harbinger Group doesn't pay dividends on its common shares. Instead, it seeks to grow its assets over time by generating sustainable free cash flow. In Harbinger's September 2012 presentation to investors, it points out that the sum of its parts valuation works out to $10.07 a share, 16.3% higher than its current share price of $8.66. The ongoing $29.5 million in dividend cash flow from Spectrum will help maintain a floor price on its stock while it continues to find assets to build over time. Income investors might not like it, but how many people who've owned Warren Buffett's stocks over the long-term are complaining? Very few.

We're Number Two
Spectrum Brands competes with Energizer Holdings (NYSE:ENR) and Procter & Gamble (NYSE:PG) in batteries, and with Scott's Miracle-Gro (NYSE:SMG) and Central Garden & Pet Company (NASDAQ:CENT) in the home and garden industry. It also competes with several other companies in several different industries. Needless to say it has a lot of competitors. In fiscal 2012, it has made two major acquisitions - Black Flag, which it acquired in October 2011 for aprox. $44 million and FURminator, which it acquired in December 2011 for $140 million. In the consumer products business, it seems you aren't growing if you aren't buying and that puts a big strain on the finances.

In the case of Spectrum Brands, it has accumulated $1.8 billion in long-term debt that it pays approximately $200 million annually on interest. It has been able to refinance some of that debt at lower rates of interest but its 9.5% notes due June 15, 2018, are a profit killer. These have to go sooner rather than later. On the bright side, its total gross debt in fiscal 2007 was 9.0 times adjusted EBITDA. In fiscal 2011, it was 3.4 times adjusted EBITDA so it's definitely moving in the right direction. Focusing on the number two brands in markets with high barriers to entry, it will likely continue to grow free cash flow. It shouldn't have a problem keeping up with the dividend.

SEE: The Perks Of Dividend Reinvestment Plans

Value Equation
Harbinger Group's stock closed September 18 at $8.66 a share with a market cap of $1.2 billion. Spectrum Brands' market cap is $2.1 billion. Therefore, Harbinger's 57% is worth $1.2 billion, meaning its three other operating businesses along with its other passive energy investments can be had for absolutely nothing. The catch is that Phil Falcone is the CEO and founder.

In June, the SEC filed a lawsuit in federal court accusing Falcone of several charges, including borrowing $113 million from his hedge fund to pay for personal expenses. His hedge fund, Harbinger Capital Partners, once had as much as $26 billion in assets under management. However, due to losses incurred from LightSquared's satellite system being shut down by the FCC, its assets have shrunk to $3 billion. The biggest risk is that Falcone is banned from being an officer of a public company, which would prevent him from running Harbinger Group. On the bright side, Harbinger Group has a reasonably strong supporting cast and could probably carry on without him, although many see an investment in Harbinger as an investment in Phil Falcone. If he's gone, who's going to forecast the next real estate crash? It's a risk for sure.

The Bottom Line
As much as Falcone's legal troubles are worrisome, the value provided by Harbinger Group is too compelling to pass up. I wouldn't bet the farm, but a small purchase in a diversified portfolio probably couldn't hurt.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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