US Companies Boosting Dividends Ahead of Fiscal Cliff

November 29, 2012Investingby EW News Desk Team


A record number of US companies are paying out special dividends this year in an attempt to avoid any possible tax hikes due to kick in at the beginning of 2013 if Congress and the White House cannot agree on a plan to reduce the federal budget deficit. 

With the fiscal cliff just a few weeks away and Congress still at odds, a record number of US companies have announced special dividends in recent months in order to escape potentially higher taxes on equity income payments.

On January 1, with the expiration of the so-called Bush-era taxes, the tax rate on dividend income could jump to a top rate of 43.4 percent, as opposed to a current rate of 15 percent.

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On Wednesday, Costco announced it will use proceeds from a $3.5 billion debt offering to finance a special dividend of almost $3 billion next month, or $7 per share. This is on top of its regular quarterly dividend of 27.5 cents per share, making it the largest payout so far from any US company.

Last week, Costco’s biggest rival, Wal-Mart, moved its planned dividend to late December from early January to help shareholders avoid any increase in the tax rate.

The New York Times explained the rush for dividend payouts:

The Walton family, which founded Wal-Mart, could save as much as $180 million in federal income taxes after the huge retailer announced Monday that it would payout its quarterly dividend on Dec. 27 instead of Jan. 2, as was scheduled.

Other companies who have announced a special dividend include Las Vegas Sands and Walt Disney.

As of Wednesday morning, 173 companies have announced special payouts in November, compared to only 72 a year ago, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

Silverblatt added that 404 companies within the S&P 500 are now paying dividends, the highest number since November 1999, averaging 2.29 percent, which is much higher than the 1.65 percent return on 10-year Treasury bonds.

He said:

The sheer number of them is amazing. I find no precedent like this at all going all the way back to the 1950s.

Analysts are expecting cash rich companies such as Microsoft and Apple, which has more than $120 billion in cash reserves and already pays out a regular dividend, to make similar announcements soon.

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