Costco joins growing crowd with special dividend

The big discount retailer will pay shareholders $7 a share in a special dividend, one of a host of companies moving to save shareholders millions on taxes if tax rates jump next year.

By Charley Blaine Nov 28, 2012 3:27PM
Updated: 8:10 p.m. ET.

The oft-cited reason that Costco Wholesale (COST) announced a special $7-a-share dividend Wednesday is that it's trying to get ahead of the fiscal cliff.

The mix of tax increases and federal spending cuts would boost tax rates on dividends from 15% now to as much as 43.4% after Jan. 1 unless Congress steps in. So companies are paying out now to save their shareholders a lot of money.

The special dividend is payable Dec. 18 to shareholders of record on Dec. 10. It comes on top of a regular dividend of 27.5 cents a share to be paid at the end of the week.

Wall Street was delighted at the news, and investors hoping to cash in pushed the shares to $102.58 Wednesday afternoon, up $6.07, not far from its all-time closing high of $102.75, set on Sept. 13. Costco was rising in after-hours trading as well.

Costco was the top performer in the Standard & Poor's 500 Index ($INX) and second best among Nasdaq-100 ($NDX) stocks after Green Mountain Coffee Roasters (GMCR), which jumped $7.91 to $36.86. 

Another reason for the stock's gain. The company said sales for the four weeks ended on Nov. 25 reached $7.51 billion, up 9% from a year ago.

Costco shares have risen more than 22% this year, compared with 11.2% for the S&P 500 and 15.6% for the Nasdaq-100. © Spencer Platt/Getty Images

Costco is joining a growing list of companies announcing special dividends to shareholders that will limit the tax bite.

The list includes liquor-producer Brown-Forman (BF.B), casino operators Las Vegas Sands (LVS) and Wynn Resorts (WYNN), Ethan Allen Interiors  (ETH), department-store operator Dillard's (DDS). But market research firm Markit says some 100 companies have announced special cash dividends to get ahead of the possible tax increases.

Costco's special dividend will cost the company some $3 billion. That would theoretically use up most of its cash and short-term investments, which totaled $4.8 billion at the end of the fiscal-fourth quarter. Not to worry. The company is selling $3.5 billion in notes to finance the dividend. The notes will mature in three, five and seven years.

Special dividends aren't being made to beat the tax man, however. In some cases, they seem to benefit the top management more than anyone else.

In fact, says Markit, the key variable in predicting if a special dividend will be declared appears to be insider ownership. Of 74 companies examined by Markit, an average of 30% of the shares were owned by insiders.

The poster child for this is Sheldon Abelson, chief executive officer of Las Vegas Sands,  which declared a special dividend of $2.75. Abelson, his wife Miriam and two family trusts own 51.5% of the company. They will receive nearly $1.2 billion of the payout.

The tax savings: Perhaps as much as $330 million. Not exactly chump change.

Wynn Resorts founder Steve Wynn and his former wife Elaine also will save a lot of money. The casino company declared a $7.50 special dividend in October. That means $148.3 million paid out to the former couple. (He owns 10% of the company; she owns 9.7% and, despite the divorce, is also a director.)

Getting the cash now will save them a total of $42.1 million.

Which brings us back to Costco. True, former CEO and co-founder Jim Sinegal will receive $16.5 million from the dividend (and save $4.7 million in taxes by getting it now), and CEO Craig Jelinek will receive $3.2 million and save $918,000.

But company insiders own only 1.2% of the shares. Institutions own 76.5% of the stock. They include the Capital World Investors, Vanguard, T. Rowe Price, Fidelity Management and Research and the Bill and Melinda Gates Foundation.

Bill Gates, the co-founder of Microsoft (MSFT), is a Costco director. His 31,840 shares will realize $222,880, he will save as much as $63,300.  (Microsoft is the publisher of MSN Money.)

There are plenty of companies that could declare special dividends. The biggest is Apple (AAPL), down $1.84 to $582.94 on Wednesday. The iPod, iPhone and iPad maker is sitting on $121 billion in cash and short-term securities as of Sept. 29. That's up nearly $40 billion from a year earlier and up 395% from $24.5 billion at the end of its 2007 fiscal year.

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