A Flurry of Special Dividends

12/05/2012 11:30 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

With dividend tax rates likely on the rise, a number of companies have been opting to roll out special dividends for investors before any new tax law comes into effect, notes Jim Trippon of Dividend Genius.

Occasionally some companies will declare a special dividend, which often ends up being a nice bonus for investors. After all, you may own a stock for its regular dividend or perhaps for its dividend income along with some capital appreciation, but when a company throws extra cash your way, that's something unexpected and one of life's positive surprises.

With the near certainty of dividend tax rates about to go up-it's a question of how much, not if-dividend investors have been paying even stricter attention to what goes on with their stocks. Top tax rates on dividends may rise from the current 15% to as much as 43.4 with the Affordable Healthcare Act tax included. In less than just the last two months, about four times as many companies as usual have announced special dividends, with several stating they did so to get ahead of the upcoming likely tax rate changes.

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Corporations have amassed roughly $3 trillion in cash and are figuring out how to use it. Earlier in the year AOL (AOL) paid a hefty special dividend, and Tyson Foods (TSN) announced it would pay its first special dividend in more than three decades. Another company that made a big splash was casino operator Wynn Resorts Ltd. (WYNN), which recently paid out $750 million in a special dividend.

The total payout comes to $8 per share, which includes the regular $0.50 per share dividend. CEO Steve Wynn pointed out that higher tax rates may discourage companies from paying dividends, as they'll instead use the cash in other ways. Sheldon Adelson, CEO of rival casino company Las Vegas Sands (LSV), on the other hand, announced plans to raise its dividend and is still an enthusiastic proponent of dividends.

Wynn was one of the bigger names to pay out the extra cash, but some smaller companies did as well. A regional bank, Kansas City's Commerce Bancshares (CBSH), with a $3.5 billion market cap, declared a $1.50 per share onetime payment on November 2. While Wynn's company has paid special dividends in the past, this was a first for Commerce Bancshares and its happily surprised investors.

Accelerated Dividends

The current 15% tax has been the rate on dividends since 2003, when the Jobs and Growth Tax Reconciliation Act was passed. This was passed during President Bush's administration, with most tax cuts originally set to expire in 2010, but the cuts were extended through 2012. With this law due to expire January 1, dividends would then be taxed at the rate of ordinary income.

In addition to those companies, which have decided or are considering paying a special dividend, some other companies are moving up their payment date. The most widely known of these is Wal-Mart (WMT). The Wal-Mart board of directors decided to move up the payment of its fourth quarter dividend to December 27 of this year, ahead of its regularly scheduled payment date of January 2, 2013.

Some companies are so eager to return shareholders some cash that they're simply declaring the payments before they've even worked out the details. National Beverage (FIZZ), announced that it will pay a special dividend that will range from $1.50 to $3.00 per share, and that it would likely be paid in the calendar year 2012 so that taxpayers can take advantage of the tax laws of the current year.

National Beverage doesn't pay a regular quarterly dividend, but it has often paid special dividends when it accumulates what it considers surplus cash. This small-cap stock has been something of a powerhouse, with strong shareholder returns. Its CEO, Nick Caporella, not only writes some of the most creative and entertaining company news releases, but he's also a savvy manager who's historically been a committed owner, which helps explain why he's shareholder friendly.

While many are predicting the demise of dividends due to the upcoming tax increases, such a view doesn't square with the history of dividend paying stocks and investing. There will no doubt be a period of adjustment, possibly a wrenching one. Many of the companies paying special dividends have a management that has considerable skin in the game. Caporella at National Beverage controls 75% of its shares, while Steve Wynn remains Wynn Resort's largest shareholder.

There may be a flurry of more special dividend announcements, or at least companies pushing their payment dates back to this year's calendar. For the special dividends, in addition to strong insider ownership as one factor, companies with good balance sheets and cash flow, and most of all, a pile of surplus cash, will be candidates to reward shareholders with some of it.

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