This week retail giant Costco became that latest high-profile company to announce a “special dividend” payment to shareholders. The special dividend will be paid before the end of the year.
Around 100 publicly traded companies have issued special dividends during 2012. The primary logic surrounding these decisions involves taxes. With the fiscal cliff hanging over the economy, and with Obamacare taxes on dividends and capital gains phasing in for higher income earners in 2013, companies are making the move to return cash to shareholders before taxes go up.
The move appears to make sense, and special dividends are usually well received by investors. At the same time, however, investors need to remember that the value of the cash required to pay a special dividend is theoretically already inherent to a company’s stock price.
Perhaps I’m looking a gift horse in the mouth, and perhaps I’m thinking to deeply about the special dividend process, but I find myself a bit apprehensive about all these announcements.
My apprehension is twofold. On one level I look at some of the companies, like Costco, declaring special dividends and I realize the companies on the special dividend list are some of our best and most innovative American corporations.
When I invest in a company, I want that company to make money and I am trusting the management of that company to employ the company’s assets to create more value for me, as an investor, over time. So it’s somewhat disappointing these corporations don’t perceive more opportunity in this economy and feel the best way to use the cash resources of the corporation is to return it to shareholders.
While I’m not criticizing management for making the decision to return this cash if they’re not able to reinvest it in the business, it is disappointing these decision makers do not perceive more opportunity in the economy right now.
The other concern I have has to do more with individual financial planning issues. The best dividends are ones that investors can count on over time, and a predictable and growing dividend yield is an extremely powerful planning tool, especially for retirees.
My concern is that tax law changes could make dividends a less attractive way to reward shareholders, and that after paying out their special dividends some companies may elect to pay less in dividends going forward.
This would be extremely unfortunate in this low interest rate environment, as many retirees have turned to dividends as a way to fund their income needs. If this trend were to take hold, it would be yet another unintended consequence of the convoluted federal tax system.