Professor Ajay Patel Explains Why Companies are Paying Out Early Dividends Before Year’s End

11.30.2012 Article, Faculty News

N.C. companies pay dividends early to avoid higher rates of 'fiscal cliff'
Reposted from The Charlotte Observer | By Ely Portillo

Some North Carolina companies are joining a growing number of U.S. firms paying out early dividends before the end of the year, as tax increases on dividends are seen as likely in 2013.

Charlotte-based manufacturing firm SPX is paying shareholders its 25-cent per share quarterly dividend on Dec. 27, instead of in early January, as it did last year. And two weeks ago, Matthews-based Harris Teeter declared a special 50-cent per share dividend, to be paid on Dec. 31.

Executives at SPX and Harris Teeter declined to comment on their dividend decisions. But Charlotte-based apparel retailer Cato Corp. said in November it was accelerating its 25 cent quarterly dividend to avoid higher tax rates.

“The Board of Directors chose to accelerate the payment to benefit shareholders affected by any 2013 tax increase,” said Cato, in a news release. It’s moving the dividend payment up six days, to Dec. 28.

Wake Forest University finance professor Ajay Patel said such moves by companies are a strong indication that the market is convinced higher dividend tax rates are coming.

“The market’s anticipating a very strong likelihood that taxes will go up,” said Patel. “It’s not surprising to see some companies begin to (pay special dividends). It’s surprising not to see more companies doing it.”

Dividend tax rates were reduced to 15 percent under the Bush-era tax cuts. But that rate is scheduled to expire in January, and taxes would likely then rise – although no one knows exactly how much yet.

Lawmakers are negotiating now over a compromise to avert the so-called “fiscal cliff,” an automatic package of spending cuts and tax increases set to take effect next year if no deal is reached. Any deal could include higher taxes on dividends, which were a point of contention during the presidential campaign. And the president’s healthcare reforms also include a 3.8 percent tax on dividends to help fund it.

Around the nation, at least 170 companies have declared special dividends in November, more than twice as many as the same month last year, according to news reports. Some of the biggest names in the corporate world are paying out billions of dollars worth of dividends to shareholders.

Costco is giving shareholders a $7 per share payment on Dec. 18, funded with a $3.5 billion debt offering. Las Vegas Sands, the casino company controlled by Sheldon Adelson, will pay shareholders $2.75 a share in a special dividend on the same day.

And Wal-Mart moved up its dividend payment from January to December, dispensing more than $1.3 billion to shareholders before potential higher rates.

Analysts have speculated that some of the biggest corporations, such as Apple and Microsoft, could follow suit in the coming weeks.

Around North Carolina, other companies have said they’ll pay special dividends this year. Mount Airy-based Surrey Bancorp declared a special 18-cent per share dividend this week, to be paid on Dec. 27. Newton-based People’s Bancorp declared a special 5-cent dividend, to be paid on Dec. 14.

Mattress and upholstery fabric maker Culp, Inc., in High Point both moved up its regular 3-cent dividend to Dec. 28, and announced a special dividend of 50 cents per share, payable on the same day.

“We are pleased to provide additional and timely opportunities to reward our shareholders,” said CEO Frank Saxon said, in a statement. With 12.2 million shares outstanding, the special dividend represents about $6.1 million headed to shareholders. The company had more than $28.7 million in cash at the end of its most recent quarter.

Harris Teeter’s special dividend payment will total approximately $24.7 million, based on the company’s more than 49.3 million shares outstanding. Harris Teeter had about $212 million worth of cash at the end of fiscal 2012.

Patel said the companies are doing the sensible thing from a business standpoint by paying shareholders now. “If you know you’re going to pay them in January, why not pay them Dec. 31?” he said.

Patel also said the early dividend payments could help investors who depend on dividends, such as retirees.

Companies often issue special dividends when they feel they have excess cash, but don’t know if they’ll have enough cash flow to sustain a higher regular dividend.

“They have some cash they can dispose of now, but they don’t anticipate having it in the future,” said Patel. “Special dividends, in that instance, are welcome, but the signal is less positive than if they bumped the regular dividend.”