companies paying 2013 dividends in 2012…

[SK in CV]

[quote=no_such_reality]No, I’m saying the companies are choosing to pay out now because they estimate that their investors will get less in the future even after they grow it at their rate of return.

So the companies are saying it’s better to give the money to investors today at 15% dividend rates, than invest it and provide a capital gain which will likely be taxed at 20% next year.

In essence, if they’re just going to hold the money to pay a dividend in the future, that future dividend could be taxed at up to 43.4% plus State Taxes.

Which all just boils down to they can’t productively use their available capital.

For example: Let’s say Oracle has $10,000 in dividends they’re prematurely divesting. If they didn’t divest them, they would managing them as an asset. Oracle’s Return on Assets is 11% (let’s call it 10% for easy math). That $10,000 invested by Oracle at their current return on asset rates would generate $1000 of earnings. At Oracle’s current 16 P/E ratio, the $1000 of earning’s is work $16,000 of market cap gain, which is $16,000 stock value.

So $10000 given to you today at 15% tax means you get $8500 and Oracle says that’s better than paying 20% tax on $16,000 of their current return on asset (which is $12,800) or if distributed as future dividends at max tax rate (43.4%), $9056.

So it’s either a knee jerk reaction by petulant CEOs and boards or those companies doing it basically are saying they can’t maintain their return on assets going forward by investing more.[/quote]

I think you misread it a bit. Since corporate tax rates have not yet changed, nor are are there any serious talks of them changing (at least their not near as imminent as individual rate hikes are), the internal rate of return for the companies won’t be changing. What these dividends tell me is that these companies that are declaring special dividends (Costco for sure, Oracle maybe) have been sitting on way too much cash, without anything good to do with it. We’ve had these low individual tax rates on dividends for 10 years. If they can do it now, they could have been doing it for years.

For those that are simply accelerating 2013 Q1 dividends into 2012, I don’t think it’s indicative of anything other than logical tax planning. Pay out a January dividend a few days early. No tax ramifications for the company, possible ramifications for some of the stockholders. They have to pay the taxes a year sooner, with a possible lower tax rate. No biggie.

[no_such_reality]

No, you misunderstood what I said SK.

[quote]
What these dividends tell me is that these companies that are declaring special dividends (Costco for sure, Oracle maybe) have been sitting on way too much cash, without anything good to do with it.
[/quote]

In a nutshell, that’s what I said. A simple move a January payment to December, that’s nothing.

A special dividend. A pay the first 3 quarters of 2013 in December. That’s ‘we don’t have anything worth while to do with the money’.

Which then begs the question, why have they been sitting on it…

[dumbrenter]

[quote=no_such_reality]No, you misunderstood what I said SK.

[quote]
What these dividends tell me is that these companies that are declaring special dividends (Costco for sure, Oracle maybe) have been sitting on way too much cash, without anything good to do with it.
[/quote]

In a nutshell, that’s what I said. A simple move a January payment to December, that’s nothing.

A special dividend. A pay the first 3 quarters of 2013 in December. That’s ‘we don’t have anything worth while to do with the money’.

Which then begs the question, why have they been sitting on it…[/quote]

I get what you are saying but you are saying two different things:
1. the company RoA estimate is such that they do not think they can beat the increase in tax rates in dividends, hence figure it is better to return shareholder money.
2. They had a low dividend tax for a decade where they never paid out that good, but now that it is about to expire, they suddenly fell in love with returning shareholders some money.

[SK in CV]

[quote=dumbrenter]
I get what you are saying but you are saying two different things:
1. the company RoA estimate is such that they do not think they can beat the increase in tax rates in dividends, hence figure it is better to return shareholder money.
[/quote]

This is kinda what I thought he meant. Hopefully he didn’t. It makes no sense. Individual tax rates have no bearing on a corporation’s internal rate of return.

[no_such_reality]

[quote=SK in CV][quote=dumbrenter]
I get what you are saying but you are saying two different things:
1. the company RoA estimate is such that they do not think they can beat the increase in tax rates in dividends, hence figure it is better to return shareholder money.
[/quote]

This is kinda what I thought he meant. Hopefully he didn’t. It makes no sense. Individual tax rates have no bearing on a corporation’s internal rate of return.[/quote]

Individual tax rates changes the investor’s perceived value of the company retaining those earnings on assets.

By accelerating disbursements, management is essentially agreeing with the lower value.

Management is admitting that their planned growth from the additional asset (cash) investment will be worth less to the investor in year than having the cash today.

[SK in CV]

[quote=no_such_reality]

Individual tax rates changes the investor’s perceived value of the company retaining those earnings on assets.[/quote]

If the higher individual tax rate on dividends occurs, it will be more cost effective to retain the earnings in the future.

[quote=no_such_reality]By accelerating disbursements, management is essentially agreeing with the lower value.[/quote]

I think accelerating the dividends beyond a few quarters acknowledges that these companies have retained more than was needed for operations and current expansion plans. It says nothing about the future. As noted, because the rates at the individual level are anticipated to be higher for dividends than capital gains, in the future retention of the earnings may be the more effective strategy.

[quote=no_such_reality]Management is admitting that their planned growth from the additional asset (cash) investment will be worth less to the investor in year than having the cash today.[/quote]

I dont think any such claim can be made about the future. Dividends may be worth more to the investor today than a year from now, but solely based on the tax considerations, the value of cash availability to the company is unlikely to change. It’s an acknowledgment, at most, of a lack of concern for shareholders in the past.

The acceleration of the dividends is a pure tax play for stockholders.

[Author]

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