What are companies going to do with the cash?
It’s been well reported that corporations continue to hold cash as they wait to see what the economy will do. But with uncertainty over what the tax code will look like next year, they’re now going to have to make some tough decisions.
From the New York Times:
Investors are bracing for companies to ramp up purchases of their own shares in response to expected tax changes in the new year, despite growing criticism of buybacks.
Companies have two main ways to return cash to investors: paying money in quarterly dividends or repurchasing shares on the open market. A number of academics and investors, and a new industry survey, suggest that companies are likely to shift more money to buybacks after this year because taxes on those gains are expected to grow less than a proposed tax increase on dividends.
Peter C. Andersen, a portfolio manager at Congress Asset Management, expects share repurchases to increase and has added them to his list of the 10 most important things to consider when analyzing a stock. Last week, Mr. Andersen added News Corporation to the 23 other stocks in a mutual fund he runs because of, in part, the company’s growing buyback program over the last two years.
“Dividends were the big thing,” said Mr. Andersen, who manages the All Cap Opportunity mutual fund. “I think we’ll stop seeing that popularity, and the new focus will be on stock buyback programs.”
Wall Street and corporate America have been taking steps to prepare for the broad array of tax increases and spending cuts set to fall into place at the end of the year. While the White House and Congress are negotiating a compromise that could avert some of these changes, most executives and investors expect at least some tax rates to grow even if a deal is struck.
Some executives stand to gain as well, according to the Wall Street Journal:
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 held 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%.
Markit, which screened for insider holdings and followed up with surveys, projects that 30 companies will announce $13.9 billion worth of special dividends by the end of December. Nine of the companies on the list have already made announcements, including Jack Daniel’s maker Brown-Forman Corp. on Tuesday.
So far, around 100 companies have issued special dividends in the fourth quarter. In normal years, around 30 companies make such moves in the period, says Chaitanya Gohil, Vice President, Markit Dividend Research.
Even the blogs are picking up on the dividend debate. Here’s an excerpt from The Motley Fool:
Several companies will pay out fourth-quarter dividends to shareholders in December instead of the regularly scheduled January payout date. For example, Missouri-based industrial manufacturer Leggett & Platt, which has increased its dividend every year for more than four decades, decided to move up its dividend to December. Other companies will gift shareholders with a special one-time cash dividend by year-end.
The reason? They want to spare investors from having a bigger chunk of their dividend income taken away by the Grinch (in this case, Uncle Sam). As it stands, taxes on dividends are slated to increase next year unless Congress averts the fiscal cliff by extending Bush-era tax cuts.
Less cynically, dividend payments could be in response to excess cash on company balance sheets. After all, S&P 500 companies hold an estimated $900 billion in balance sheet cash, up roughly 40% from just four years ago. Or companies’ wish lists simply lack acquisition targets.
Some companies chose not to accelerate their dividend payment. For instance, a company may not know where its year-end profit will end up (like retailers not knowing how Black Friday sales will affect the bottom line). In these cases, the board of directors may not want to approve a dividend payout until that becomes clearer.
No matter the motive, many investors may find themselves a little be richer this holiday season.