In the throng of U.S. companies now issuing special dividends or just hurrying up the payment of regular ones in anticipation of higher tax rates in 2013.
Meanwhile, dividend-hungry shareholders of dozens of other companies won't have to wait.
From Costco, which will pay shareholders a $7 special dividend Dec. 18, to Wal-Mart, which is moving up payment of its fourth quarter dividend from Jan. 2 to Dec. 27, companies are speeding dividends to beat the scheduled expiration of low tax rates that have been in effect since 2003.
Just how much investors might save on their taxes depends on the outcome of budget negotiations now taking place in Washington, D.C. Many do not expect tax rates on dividends to remain at 15 percent next year. Whether they jump as high as 43.4 percent -- where they would end up if the Bush-era tax cuts are allowed to expire and no other changes are made -- remains to be seen.
A similar spate of dividend announcements appeared in 2010, the last time Congress faced the prospect of letting Bush-era tax cuts expire. Back then, Congress extended the cuts for another two years because of the weak economy, but pressure to do something about mounting federal deficits makes a dividend tax increase more likely this time around.
"People are thinking the chances of dividend tax rates going higher now are greater than they were in 2010," said Linda Bakhshian, co-manager of three dividend-oriented funds at Federated Investors.
Jonathan Browne, an assistant portfolio manager with the Pittsburgh-based mutual fund operator, said there have been about twice as many special dividend announcements as there were in the waning months of 2010. In this November alone, he said, there were as many special dividend announcements as in all of 2010.
Companies are being more upfront this year about why they are making the payments than they were two years ago. While many of the 2010 announcements did not cite the potential tax increase, "This time around you have dozens of firms doing these things and saying it was because of taxes," said Jeffrey L. Hoopes, a Ph.D. candidate at the University of Michigan's Ross School of Business.
He said when the National Beverage announced it would pay a special dividend, the Fort Lauderdale, Fla. beverage maker explained it this way: "Foregone tax rates stimulate shareholder payback." In the announcement, chairman and CEO Nick A. Caporella lamented that "final services for President Kennedy's 'what you can do for your country' " were held Nov. 6, when President Barack Obama was re-elected.
What the announcement did not disclose is that Mr. Caporella will be the biggest beneficiary of the $2.55 per share dividend his company will pay. He owns 34 million, or 74 percent, of National Beverage's shares and will collect an estimated $87 million in dividends -- before taxes.
Mr. Hoopes co-authored a study of the 2010 dividends that confirmed long-held beliefs about what kinds of companies are more inclined to pay special dividends. The 2010 payments were concentrated among companies where insiders controlled large blocks of stock, a pattern that persists in the 2012 crop of special dividends.
Officers and directors of Commercial National own 22 percent of the Latrobe bank's shares while insiders own about 12 percent of Federated Investors' shares.
Investors cheered when Las Vegas Sands announced a special dividend of $2.75 per share, none of them louder than chairman and CEO Sheldon G. Adelson, a big contributor to failed Republican presidential candidate Mitt Romney. Along with his wife, Miriam, Mr. Adelson owns 52.4 percent of the casino operator's shares. Before taxes, the dividend will provide the couple with a year-end bonus of $1.2 billion.
Depending on how you look at it, insiders are either issuing dividends out of self-interest or their large holdings motivate them to do things that are good for shareholders.
"In the end, it's the same exact reason. It's just a different way of saying it," Mr. Hoopes said.
How much might shareholders save on taxes?
Based on the number of companies that accelerated dividend payments from January 2011 to December 2010, Mr. Hoopes and co-author Michelle Hanlon of the Massachusetts Institute of Technology estimated shareholders would have saved $338 million had the tax rate on dividends jumped to 35 percent in 2011.
Wal-Mart's decision this year to shift its 39.8-cent quarterly dividend from January to December -- with a price tag of about $1.3 billion -- could provide savings comparable to the 2010 estimate, Mr. Hoopes said. Another company pulling its dividend into December is Walt Disney, which is increasing its annual dividend 25 percent to 75 cents and paying it Dec. 28.
Unlike quarterly dividends, which commit companies to making fixed payments on a regular basis, special dividends are not long-term commitments. Companies making them have to have strong balance sheets and lots of cash, Ms. Bakhshian said.
"We'll take the special as long as it's done in a prudent manner," she said.
As a dividend investor, Ms. Bakhshian prefers companies that pay out cash to investors on a regular basis. But some question whether special dividends are the best use of cash. Pittsburgh investment manager Jeff Mindlin would prefer companies that invest excess cash in acquisitions that boost their market share and give them better pricing power.
"I'm not sure this is the best present a shareholder can get," Mr. Mindlin said. "Don't they have anything better to do with their cash than to give it back?"
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OCTOBER 30, 2014
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