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Special Dividends Surge Fourfold as U.S. Tax Increase Looms

Special Dividends Surge Fourfold as Tax Increase Looms in U.S.
From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared a one-time cash payment to shareholders, up from about 15 in the year-earlier period, according to data compiled by Bloomberg. More than a dozen said they acted because of a pending dividend-tax increase. Photographer: Jerome Favre/Bloomberg

Companies from Wynn Resorts Ltd. to IDT Corp. are paying special dividends at four times the pace of last year, helping investors stay a step ahead of the taxman with rates poised to jump in 2013.

From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared a one-time cash payment to shareholders, up from about 15 in the year-earlier period, according to data compiled by Bloomberg. More than a dozen said they acted because of a pending dividend-tax increase.

Congress is poised to let the rate on dividends, which was lowered to 15 percent during the George W. Bush administration, increase after President Barack Obama won a second term on a pledge to exact more revenue from top earners. Obama highlighted low levies on dividends and capital gains as one reason Mitt Romney, his Republican opponent with an estimated $250 million fortune, paid a lower income-tax rate than average workers.

“It’s a foregone conclusion the rates are going up -- it’s just a matter of how high they go,” said Todd Lowenstein, a Los Angeles-based money manager with HighMark Capital Management Inc. “When you know that 15 percent tax rate is going away and you have excess cash buildup, it makes sense to return some of it back to shareholders now.”

If Congress takes no action, the dividend tax will revert to the ordinary income rate, which tops out at 39.6 percent. Companies, which according to data compiled by Bloomberg are sitting on $3 trillion of cash, can afford to give back to shareholders and create some goodwill by showing they’re attuned to possible higher taxes, Lowenstein said.

‘Thanking Us’

It worked for Commerce Bancshares Inc., Charles Kim, chief financial officer of the Kansas City, Missouri-based bank, said in a telephone interview. Happy shareholders called and sent e-mails immediately after the bank declared a $1.50 a share one-time payment on Nov. 2, its first-ever special dividend.

“They weren’t asking for it beforehand, but they certainly were thanking us for it afterward,” Kim said. About half of the bank’s shareholders are retail investors, and “it’s very likely for a good portion of our shareholders their tax rates on dividends will be going up.”

IDT, a Newark, New Jersey provider of prepaid mobile-phone calling cards, went a step further, pulling some of its dividend for next year into this one. The company canceled its 15-cent quarterly payout for the rest of the fiscal year that began in October and instead paid a 60-cent special dividend this month to lock in the lower tax rate.

Insider Ownership

“Our stockholders are best served by paying this dividend now,” Chairman and Chief Executive Officer Howard Jonas, who owns a 23 percent stake in the company, said in a statement.

Like Jonas, chairmen were listed among the top-two shareholders in several of the 59 companies paying special dividends before year-end, including Masimo Corp., Progressive Corp. and NewMarket Corp.

With Democrats retaining and expanding their majority in the Senate and picking up House seats in the election, Obama may have more leverage to reach a revenue-boosting budget deal with Republicans, who campaigned against raising tax rates. Both parties are under pressure to negotiate an accord before the so-called fiscal cliff of automatic tax increases and spending cuts kicks in at the start of 2013.

Wal-Mart, Tyson

The calendar is influencing even the payment of regular dividends. Wal-Mart Stores Inc., the world’s largest retailer, today moved the payment of its fourth-quarter dividend to Dec. 27 instead of the previously scheduled Jan. 2.

“Wal-Mart’s board recognized that there are complex fiscal and federal tax rate issues that may not be resolved in the next few weeks,” Randy Hargrove, a spokesman for the Bentonville, Arkansas-based retailer, wrote in an e-mailed statement.

Tyson Foods Inc. today declared its first special dividend since 1977 and raised the regular quarterly payout, helping push the largest U.S. meat processor’s shares to their biggest gain since December 2008. The 10 cents-a-share special dividend is twice the new quarterly amount. Both are payable Dec. 14.

Dividends are regaining popularity after falling out of favor in the 1990s amid rapidly rising stock prices led by Internet-related companies and a trend toward share repurchases as way to return cash to investors.

Investors see dividends as a counter to sluggish earnings growth amid a worldwide economic slowdown and to low interest rates that have cut fixed-income returns, said Ron Graziano, a Chicago-based global accounting specialist with Credit Suisse Group AG’s Holt unit.

Using Cash

A special dividend is a good tool for reducing companies’ cash holdings because, similar to a share repurchase, it doesn’t commit the company to a regular payout, Graziano said in a phone interview. The move makes even more sense with the looming increase in the tax rate, he said.

“Record amount of cash on the balance sheet, the demand of yield and return of capital by investors, and the pending tax rules are all three pieces that are coming together as a big catalyst for this increase in special dividends,” he said.

Including additional levies related to health-care reform, the rate on dividends would reach about 44.3 percent in the highest tax bracket, Graziano said.

Raising the tax rate will steer companies away from dividends and may ultimately reduce government revenue, Steve Wynn, chief executive officer of Las Vegas-based Wynn Resorts, told analysts and investors on an Oct. 24 conference call. Wynn Resorts declared an $8-a-share dividend, including the regular 50-cent quarterly amount, payable on Nov. 20.

Wynn on Dividends

“The dividend policy of companies is very often affected by the tax policies of the government,” Wynn, who owns about 10 percent of the company’s shares according to data compiled by Bloomberg, said on the call. “When the taxes on the dividends are too high, then companies don’t distribute, the shareholders don’t get the dividends and Uncle Sam doesn’t get the tax.”

Industries that pay the highest dividend rates, including utilities, telecommunications and health care, will be most affected by a higher tax rate, David Bianco, the New York-based chief U.S. equity strategist for Deutsche Bank AG, said in a Nov. 9 report.

Not all investors are clamoring for dividends. James W. Paulsen, chief investment strategist at Wells Capital Management Inc. in Minneapolis, said he would prefer that his companies invest their cash to boost earnings.

“You’d like to think that you’re invested in companies that have better uses of the capital than you do,” he said in a phone interview. “If the best they can come up with is paying out dividends ahead of the tax code, then that says something about their opportunities in the future.”

Happy Investor

Tom Higgins, a 71-year-old lawyer in Kansas City who holds Commerce Bancshares stock, might disagree. He e-mailed the bank’s chairman, David Kemper, to thank him for the special dividend. The payout will provide him with some cash for the holidays without having to sell shares and will lock in the 15 percent tax rate, Higgins said in a phone interview.

“These companies show great concern for their stockholders when they recognize they have excess capital on their balance sheet and they don’t have anything they’re burning to buy, they return it to the stockholders,” Higgins said. “It’s kind of the way the system is supposed to work.”

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