*Warning*: 43.4 percent dividend tax rates ahead!
We've got less than a month before the Bush era tax cuts expire and companies are trying to avoid the potential for “a tripling of dividend tax rates next year.” The results have shareholders ecstatic to receive some sizable payouts just in time for the holidays.
According to Reuters, Oracle Corp. has confirmed that they will be giving over $800 million back to shareholders in the next few weeks due to looming tax fears as the new year approaches.
All the recent anti-climatic fiscal cliff talks have sent stocks on a roller coaster ride as companies take advantage of super-low interest rates; issuing debt at a record rates during the month of November.
Without clarity regarding the transition for tax laws and how new legislation will affect the end of the Bush era tax cuts, Treasurers and CFOs are taking matters into their own hands now while they can still find creative ways to hedge the coming tax increases.
Special dividends seems to be the most popular option for over 100 of our nation's largest companies.
CNBC quoted Joe Levington, managing director of corporate credit at Brookfield Investment Management, regarding this matter:
Companies are using debt to fund payouts for different reasons. "I think what you're seeing is there's largely a mismatch with significant cash balances that are overseas. Companies won't repatriate that money given the tax implications. While there is cash there it's not really useable for a dividend or share repurchase," he said.
At the same time, credit quality is peaking, says Levington. "What I mean is you're going to see companies use leverage in 2013, whether it's in the form of cash to fund dividends, or more likely for acquisitions and share repurchases. That will be a trend that you'll see throughout the year," he said.
Currently the dividend tax rate is 15 percent, but that is set to expire on Dec. 31 so investors have been dumping dividend paying stocks, fearing what the fiscal cliff will do to those dynamic tax rates. Investors fear that the dividend tax rate could climb all the way back up to a staggering 39.6 percent for the highest bracket if Obama gets his way and extinguishes the tax cuts for the wealthy.
Obamacare also adds another 3.8 percent tax on dividends and other investment income that will affect wealthier taxpayers too. That means the dividend tax rate could hike up to 43.4 percent! Meanwhile, capital gain taxes could spike all the way back to the previous 20 percent rate; a full five percent higher than their current 15 percent rate.
This is why companies like Oracle and DISH Network Corporation are paying cash via dividends to shareholders before all of this ensues. Yesterday, DISH declared a non-recurring dividend of $1 per share, payable on December 28 to all shareholders as of December 14.
Costco plans to offer $3.5 billion of senior unsecured notes in order to fund their dividend. Las Vegas Sands, Dillard's, Ethan Allan, Brown-Forman, and ADT have all made formal announcements regarding special dividends before the new year to dodge the 'tax-man.' Walmart also said they would move up its regular first quarter dividend to December 27.
In total, 103 companies say they are offering these “special” dividends for the fourth quarter and 66 announced this decision after the presidential election. Experts predict that at least 20 additional companies will come forward and offer special dividends for shareholders before the new year as well.
Companies are very nervous about what the new year has in store for them, but the looming 'fiscal cliff' is certainly doing a good job keeping them from hiring and spending money. On the other hand, it is driving one of the largest spikes in dividend payouts that we've ever witnessed.
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