Corporations will issue a deluge of special dividends during the next three months because of the threat of higher tax rates next year, making 2012 a record period for the one-time payouts, according to Goldman Sachs and investors.
“A well capitalized corporate America, flush with cash, and a potential shift, regardless of party, in the tax rate higher in 2013 augur a wave of special dividend announcements,” said Robert Boroujerdi of Goldman Sachs, in a note to clients Friday. “Combining the year-to-date special dividend announcements with the traditional 4Q trend, we expect 2012 to set a record.”
Goldman points out that the 15 percent tax rate set to expire at the end of this year could more than double for many investors if President Obama wins a second term and his tax proposals are enacted as a resolution to the so-called fiscal cliff.
Mitt Romney proposes keeping rates at the current 15 percent for everyone, but under one of the president’s proposals, the rate will leap up to 39.6 percent for the highest income earners, according to Goldman.
Under another of the president’s proposals that rate could be as high as 43.4 percent when one includes a 3.8 percent tax on “unearned income” for those with a gross income above $250,000 a year.
What makes special dividends special is that they are a one-time payout. Companies such as DSW, American Eagle and Basset Furniture have issued special dividends in the past month. These payouts and an overall hunt for yield by investors has driven the stock market to four-year highs.
“Dividend and buybacks — that’s why stocks are so much more compelling vs. bonds,” said Stephanie Link, director of research for TheStreet.com. Link and many other investors agree with Goldman’s premise that much more is coming before the year is out because of the fiscal cliff.
And history shows the firm could be right. In 2010, when the Bush tax cuts were first set to expire at year-end, corporations ended up paying double the number of special dividends that were issued in 2009. (The 15 percent rate was extended in the final weeks of 2010.)
Goldman points to comments from the CEO of Choice Hotels, who declared a special dividend earlier this year, to sum up the views of corporate America at this point.
“Tax rates on dividends are never going to be better,” said Steve Joyce, CEO of Choice, on their last earnings conference call. “I don’t know how much worse they are going to get, but they are going to get worse.”
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