Dividends Before the Cliff

As the US approaches the fiscal cliff, triggering what could potentially result in huge tax increases and spending cuts on January 1st, 2013, many public companies have accelerated payments of their 2013 dividends so they occur before the end of this year and/or they have declared special, one-time dividends to be paid this year. Some companies have even decided to issue new debt to pay for special distributions.

Total special dividend announcements since October 2012 exceeded $31 billion from 219 companies, according to data compiled by eventVestor. A few examples of companies who have accelerated their dividends/declared special, one-time dividends include:  Wal-Mart moved up a dividend payment that was to be paid in early January and will now be paid on December 27th, The Washington Post accelerated payment of its 2013 dividends into one consolidated dividend to be paid before the end of the month, Oracle will consolidate dividends that would have been paid over three quarters into one payment to be made this month, and Alexander’s board declared a special, long-term capital gain dividend of $122.00 to be paid on December 20th. Seaboard Corp. moved up dividend payments for 2013 - 2016 ($3.00/share per year) to 2012, payable December 28th, and announced they do not intend to declare any further dividends during 2013 - 2016.

Congress and the White House are working hard to negotiate on taxes and spending.  However, if they are not able to resolve their differences, taxes on dividends could soar from 15% to over 40% for many investors.  As the deadline approaches, Anju Marempudi, Founder & CEO of IntelliBusiness, Inc., and creator of eventVestor spoke with me briefly about these developments and the possible implications for companies and investors.

McLevey/NYSE Euronext:  Why are we seeing so many companies accelerating their dividend payments and/or paying special dividends right now?  What’s behind this surge and what do you expect to see post the dividends being paid out in these stocks?

A. Marempudi/ eventVestor:  There is almost a fourfold increase in the special dividend payments this quarter compared to the year ago period. This surge is primarily triggered by the looming fiscal cliff and the potential dividend tax increases next year. Not only companies with large cash piles have announced special dividends, but also some companies are issuing debt to finance these special dividend payments. Most companies were also very explicit in their special dividend or accelerated dividend announcements that potential tax increases next year are the main reason for their action.  While some companies have prepaid dividends for the next several quarters, a few others have done so for the next several years. These companies have also said that they will not be making any additional dividends for those periods.

McLevey/NYSE Euronext:  Companies have to be very deliberate about how they spend their cash, whether reinvesting in the business, making an acquisition, buying back stock or paying out a dividend, etc.  What should companies be thinking about as they consider these options?

A. Marempudi/ eventVestor:  Obviously the management has to find the best use for the cash and distribute accordingly, be it capital investments, acquisitions, or share buybacks. What this extreme surge in special dividends indicates is that companies have been sitting on large cash piles for which they could not find any better investment opportunity. Companies have also become very conservative since the 2008 crash and wanted to hold on to more cash. Considering the large potential jump in dividend taxes next year, these companies have decided to pay the cash in extra dividends.

McLevey/NYSE Euronext:  What about a company that paid a special, one-time dividend, does it set investor expectations for future payouts?  Does paying a special dividend send any signals to the market about that company’s business outlook?

A. Marempudi/ eventVestor:  Some of the companies that paid special one-time dividends have never paid any regular dividends before. Now there could be potential delays in these companies initiating any dividends in the near future, if at all, assuming they had been considering this as an option earlier. We could also see less of an increase in regular dividends from those companies that paid special dividends. The market will be very cautious with the companies that borrowed money to pay special dividends as this could potentially impact their ability to invest in the business. So we will also be watching for their business growth and earnings outlook.

McLevey/NYSE Euronext:  What do you expect to see from regular dividend payers?  Will paying dividends go out of style?  Will dividend-paying stocks fall out of favor?

A. Marempudi/ eventVestor:  I am not expecting any major shift in the regular dividend payments. In fact the number of dividend paying companies is at a decade high with over 400 companies in the S&P 500 index paying dividends this year. However you could see some adjustments during next year, primarily driven by this year’s special dividends and accelerated dividend payments.  This will also have an impact on share buybacks as companies look for the best ways to distribute cash to shareholders in a tax effective way.

Anju is the featured guest speaker on a NYSE webcast that will provide a deeper dive into the implications of the current dividend surge. The webcast will occur today (Friday, December 14th) at 1:00 pm EST. Click here to register.

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