11/9/2012 8:30 PM ET|
As tax hike nears, a dividend binge
Companies are making one-time special dividend payments to shareholders in anticipation of the demise of Bush-era tax cuts.
After one boom, megabust and sort-of-boom after they first went into effect, the expiration of George W. Bush-era tax cuts could goose the top individual dividend income-tax rates to more than 43% from the current 15%. This comes at a time when companies in the Standard & Poor's 500 Index ($INX) lug about $900 billion in cash, a 40% jump since 2008, that has made them net suppliers of cash to the rest of the economy.
So then what better time than these waning days of 2012 for corporate managers -- most often major shareholders themselves -- to issue special, one-time dividends? In the spirit of the holiday season, too. It stands to reason that the closer the economy gets to falling off the fiscal cliff, the more likely boards would be to sign off on such payouts. The recent precedent for this was the final quarter of 2010, when companies raced to pay out extra cash on concerns that President Barack Obama and the Republican Congress would not extend Bush-era tax cuts past the end of the year (that ball was effectively punted to the present).
A bit of history: Following Bush's midterm electoral mandate 10 years ago, the president spent a chunk of his political capital on a tax plan in 2003 that slashed rates on corporate dividends. The rationale was that more take-home from equity dividends would be both a boon to investors (and their disposable income) hit by a bear market, and a way to realign the interests of corporations and households in the wake of Enron, WorldCom and the unearthing of Wall Street rot. Market talking heads swore that the shareholder-friendly move would inspire a renaissance in investing for income.
In practice, investors displayed no particular rush to buy major dividend-payers. If anything, the 2008-09 meltdown induced a record number of blue chips to slash their payouts -- unthinkable last resorts for the bulge-bracketed likes of General Electric (GE), Pfizer (PFE) and Citigroup (C).
Today, however, corporate profits are at a record and the Federal Reserve-stoked "Great Yield Hunt" has sent tens of billions of dollars into junk bond and dividend-stock funds.
"Providing a special dividend to shareholders might be a good idea to consider in light of the election turnout," says Joseph Perry, a partner in charge of tax and business services with accounting firm Marcum, which last month joined with broker Twenty-First Securities to urge companies to pay out early and often. "If you assume that dividend tax rates will go up next year, it is prudent to help your long-term shareholders before Dec. 31." Perry says this can be accomplished either by paying out any cash dividends before year-end or by paying a stock dividend, which is generally not taxed until the stock is sold (thereby allowing investors to defer taxes until they sell their shares, and to take advantage of a long-term capital gains rate that even under the Obama plan would still be half the maximum dividend tax rate).
The calculus is a confusing one. Perry says that this time of year is normally when investors look to harvest losses, accelerate deductions, postpone income and invest in companies that don't pay dividends. "But for this year-end," he says, "they need to do the opposite."
The news tape increasingly has headlines from companies that get the need to shovel out excess cash while the shoveling's cheap.
The Buckle (BKE), a retailer based in Kearney, Neb., just announced a $4.50 special dividend in addition to its usual 20-cent quarterly dividend. By grouping the moves together, the company is effectively rewarding its investors with a 10% dividend. Last month, Trinity Bank (TYBT) of Fort Worth, Texas, said it would pay a special, one-time dividend to shareholders of $1 per share in addition to its second cash dividend of 20 cents. "We don't know what the dividend tax rate will be in 2013," said Trinity President Jeffrey Harp in the statement. "But we know it will be higher. We can provide some tangible return now to our shareholders in the most tax-advantageous manner possible."
And just ahead of the election, Commerce Bancshares (CBSH) of Kansas City, Mo., announced a special, one-time dividend of $1.50 a share in addition to its usual quarterly outlay of 23 cents. "Given the potential significant increases in tax rates on dividends beginning next year, and our strong levels of capital, it is an opportune time to provide this special dividend distribution to our shareholders before the end of the year," Chief Executive David Kemper said. Commerce also said that it would issue a 5% stock dividend in December.
According to Sandler O'Neill & Partners, the median percentage of community banks' earnings paid as dividends was 26.4% in the third quarter, which is down from 44% three years ago.
Depending on your worldview, that is a good or bad thing. Good: Such financial institutions are profitable enough to comfortably return money to shareholders. Bad: They can (and should) pay out much more. Writ large, this gets at a bigger tension: The desire for bigger dividends competes with chastened corporations' desire to hoard cash to avoid a repeat of their 2008-2009 brush with death.
More from Bloomberg Businessweek:
VIDEO ON MSN MONEY
Government should not be taxing us twice just because we decide to save rather than carelessly spend. Where is the government bailing me out when I lose my @ss on a stock??? NOT FAIR!
Govt' needs to stop acting like a reckless teenager with his mom's credit card!
Sen. Obama’s Floor Speech, March 20, 2006:
"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
Barack Obama told the press that he "refused to extend the Bush tax cuts to the wealthy again."
"But, he’s not a socialist."
Of course, it was just another lie. The actual tax cut breakdown at CNN Money:
Bush tax cuts: $544.3 billion…The bulk of that cost - $463 billion - is for the extension of cuts for families making less than $250,000, including two years of relief for the middle class from the Alternative Minimum Tax.
85% of Bush Tax Cuts Went to Middle Class, Not the Rich
blame the left wing liberal democrat socialist party and its moron voters! 4 more years of incompetence spending corruption!
and now OBAMA DEATH CARE WITH HIGHER TAXES, RATES BUT SERVICES CUT LIKE MEDICARE 700 BILLION ALREADY!
IF YOU DONT' THINK THERE WILL BE RATIONING YOU LIBERALS ARE IN FOR A RUDE AWAKENING! we're already seeing
higher food energy prices still skyrocketing and in the east the hurricane victims are seeing what the future will look like thanks
to Obama and the demos socialist agendas! more incompetence and corruption and spending and debt! thanks liberals!
This President's re-election is going to stop growth for yet another 4 years, all because people were leary of someone wealthy running the country. I think I would rather have a businessman running the country than someone who I do not believe has ever held a real job.
With that being said, has anyone ever thought about the word "trillion" ? That is a lot of money. We can tax the rich, take away their assets to put towards the deficit until they have nothing and that will barely make a dent into the trillion deficit.
Now that we are done with the rich let's go to the middle class let's make their taxes higher and take away their assets to put towards the deficit again that will barely make a dent into the trillion deficit.
We forgot the poor let's take away all their benefits and whatever they have an assets and put towards the deficit.
Bottom line we have not made much of a dent into the trillion deficit. Now lastly, we can take away our government's paychecks and assets to put towards the deficit that might put a dent in the problem. Considering I believe that our government and the people that hold offices have hidden assets.
I think before the government should be allowed to tax the people they need to reduce their salaries and benefits. Also it might help if they would share some of their insider trading secrets with we the people. The government is elected officials they do not own the country, and can be replaced with people who have integrity, and for a lot less pay.
Don't it bother anyone but me to see the younger people out there poping out kids just to get more money from the goverment.. My daughter friend is only 24 years old and has four kids get more in food stamps and goverment money than my wife and I both make working. This is sad and whats sader is she plans to have more kids. She voted for obama because she knows he is her money train.I'm tired of all the bullcrap. Obama depends on this so when her kids grow up more votes for his party. Time to stop the goverment give away.There is no future in it.Its going to break our country.
Seriously people, the only people that reads these post are the ones that understand how the economy works. The poor bastards that voted "O" back into office will never read this to understand it because they depend on Daddy O to buy them a computer and internet service so save ya'll's breath
I for one am glad all those people that are so in love with OBAMA and the JACKASS party will get to enjoy their f--kup
Obama care will "feed back" into the premiums we pay for insurance. So starting 1/1/13 we will have co-payments for the first time.
Watch the UN-employment rate begin to rise again.
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