• November 28, 2012, 9:18 A.M. ET

Costco Joins Parade of Pre-Fiscal Cliff Special Dividends



By Michael Aneiro

This just in: companies are issuing lots of special dividends ahead of the possible tax hikes accompanying the year-end fiscal cliff, in an effort to maximize the value they’re returning to shareholders.

Well, this isn’t exactly completely new, but it’s getting a lot of attention this week. The Wall Street Journal wrote a story about this trend on Monday, and the Financial Times follows with its own front-page story today about how such dividends have hit record levels (and this blog foretold this trend in September and flagged likely issuers three weeks ago). This morning,Costco Wholesale (COST) announced a $7.00 per share special cash dividend, payable Dec. 18 to shareholders as of Dec. 10, which adds up to an aggregate $3.0 billion payout.

“Today’s announcement of a $7.00 special dividend, to be paid before the end of the calendar year, is our latest effort in returning capital to our shareholders while maintaining our conservative capital structure,” said Richard Galanti, Costco CFO, in a statement.

But if you scratch the surface, there’s something beyond simple corporate beneficence at work here. These dividends are likeliest when management also owns a big chunk of company stock. Such was the case when casino operator Las Vegas Sands (LVS) issued a special dividend on Monday and retailer Dillards Inc. (DDS) did the same. Dana Mattioli explores the issue on wsj.com’s Corporate Intelligence blog:

Executives are making a big deal about being generous to shareholders when paying special dividends ahead of the year-end fiscal cliff. But in many cases they’re also being generous to themselves.

Companies run by big shareholders are more likely to pay special dividends aimed at avoiding tax hikes, market data provider Markit concludes. The firm developed the theory after reviewing dividend payouts in 2010 (ahead of expected tax increases that never came). It helds true in the spate of special dividend announcements this year. Markit found that the average insider holding of the companies that have announced such dividends was 28%.

This is happening with regular dividends too. Last week Wal-Mart (WMT) declared an early dividend, and here’s how Nathaniel Popper described it in the New York Times:

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 pay out its quarterly dividend on Dec. 27 instead of Jan. 2, as was scheduled.

The change will allow the family and other Wal-Mart shareholders to record the income this year, when the federal tax rate on dividends tops out at 15 percent. Next year, if the Obama administration and Republicans are unable to reach a compromise, that rate is set to jump sharply to 39.6 percent. High earners will have to pay an additional 3.8 percent on most investment income to help pay for the new federal health care law, bringing the total possible tax bite to 43.4 percent.

http://blogs.barrons.com/incomeinvesting/2012/11/28/costco-joins-parade-of-pre-fiscal-cliff-special-dividends/