Companies Gifting Shareholders Ahead of Tax-Law Change
Fearing a tripling of dividend tax rates next year, some companies are racing the clock to pay out billions to shareholders in one-time special dividends.
The dividend tax rate, now 15 percent, is set to expire Dec. 31, and ahead of that investors have been dumping dividend paying stocks, like utilities. But they've also been eyeing a whole other group that are or could be paying special one-time dividends.
The concern is that the dividend tax rate could revert to 39.6 percent for the highest tax bracket if Bush tax cuts are not extended for the wealthy, as proposed by President Barack Obama.
The new Affordable Care Act—or Obamacare—also includes a new 3.8 percent tax on dividends and other investment income for wealthy taxpayers, and that would take the dividend tax rate up to 43.4 percent. At the same time, capital gains taxes, now 15 percent, could rise to their former rate of 20 percent.
"I think the dividend rate will go up, but not as much as the stance of Obama at the present time," said Wharton School finance professor Jeremy Siegel. "I don't think it will be all that much different, but it is going to be higher."
The special payouts, therefore, make sense.
"It's smart," Siegel said. "Just like people taking capital gains now. It's smart."
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But the question is whether this mad dash by dozens of companies is ultimately good or bad for their performance. Siegel said it really does not matter, and CNBC's informal study of stock moves this quarter shows the same.
So far this quarter, more than 60 companies in the Russell 3000 have announced special dividends, compared to approximately 44 special dividend declarations in all of 2011.
About half of those companies that announced payouts this quarter have seen their stocks rise at least 1 percent or more, since they announced the special dividend. However, a third of those companies' stocks are down more than 1 percent, and the rest are flattish.
A common thread among companies that are paying out dividends, like Wynn's, for instance, is a big holding by insiders, families or private equity.
"If there's big insider holdings, obviously they would communicate to the firm's management that they would be prefer a dividend early because it would be taxed more later on," said Siegel. "The management should be concerned about shareholders anyway."
Larry McDonald, chief policy strategist at Newedge, said there are some stocks that fit the profile for possible special dividend payouts, including Ebay, Dell, Oracle, Microsoft, Yahoo and Charles Schwab.
Speculation about a special dividend could keep a floor under those stocks in the event of a broader market decline.
Besides big insider ownership and lots of cash, McDonald says to look to more mature businesses.
"If you've got a business that's really growing, and you start doing this then not just the board, but shareholders could take action, so it has to be a mature profile. In a declining profile, you could even get some more motivation there," he said.
Investors hunting for quick trades in these stocks should be careful.
"Trading these at this point is very risky because I've been hearing about this and hedge funds were doing this type of work in September, even August," McDonald said. "The market is down since September and August, and people are definitely bidding some of these names up and I would say a lot is priced in," he said.
McDonald said the stocks may get an immediate pop, once they announce a dividend.
That happened in the shares of Las Vegas Sands, up more than 5 percent Tuesday after announcing late Monday it would pay $2.75 per share, or $2.3 billion in special dividends to shareholders of record Dec. 10. Chairman Sheldon Adelson said the priority is returning capital to shareholders, and he is the biggest shareholder, with a 52 percent stake.
Other companies that announced special dividends this week include Brown Forman, Ethan Allen, Drew Industries, CNH and Insperity.