The economy is still not doing that well, the Fiscal Cliff is looming, and large companies still continue to pinch their pennies. So why are many publicly traded companies ready and willing to give their extra cash away? Good question…
In the recent weeks, in the light of the looming Fiscal Cliff where many believe Congress will not be able to reach a resolution and the dividend tax rate will jump (among other things), people are starting to get a bit greedy…or cautious, or weird…and some publicly traded companies are declaring large special dividends to their shareholders, which in some cases also means the CEO pads his pocket too along with all other employee-owners.
The most recent case in the 68 cases known so far is that of Costco. The big-discount, warehouse style retailer just recently announced $3 Billion in Special Dividends to be paid in December bringing the payout to $7/share versus the regular dividend rate of just $1.10/share. This will of course make for many happy shareholders as it will prevent them from paying a higher tax on their dividend returns should the tax rate increase next year. It will also have the effect of reducing Costco’s $5 Billion in cash before any fiscal uncertainty of next year. Experts suspect the likes of Bed Bath & Beyond, Staples, and Williams Sonoma to soon join the ranks (WSJ).
We are also likely to see companies move up their dividend distribution date from 2013 to 2012 to ensure payout to shareholders with the current discounted tax rate instead of risking uncertainty of next year. Wal-Mart is a big proponent of this strategy, and we are sure to see similar stories before the end of the year.
In addition, some market analysts are calling for a bullish market no matter what the outcome of the Fiscal Cliff is. Since Government spending will no-doubt decrease, the bond rates remain flat; the only chance of a strong return on investment is to go with stock. This is playing right into the hands of many mature companies looking to excel in the near-term.
Again, looking at Costco; they borrowed $2 of the $3 Billion used to pay the special dividend, but they also have plans to expand their stores and distribution centers. They are looking to expand business, not decrease it despite taking on some additional debt and decreasing their credit rating from A+ to AA-. The outcome looks the same for other large retailers like Wal-Mart and Home Depot. As investment options narrow, new business strategy takes hold. (Barrons)
As we near next year and the uncertainty of our fiscal policies seem no better defined, these trends will continue for companies that are cash heavy with stable growth. We will continue to see special dividends distributed to aid those favored with stock options, distribution dates moved forward, and stocks preferred over many other short-term investments. Only time will tell how they all fair. (Yahoo)