Businesses rush to pay dividends to get ahead of potential tax hikes

Steve Johnson and Brandon Bailey / San Jose Mercury News /

As the nation gets close to plunging over the metaphorical fiscal cliff, triggering what could be massive tax increases and spending cuts in January, scores of businesses are taking steps to soften the landing for their shareholders.

More than 100 companies nationwide are paying dividends in advance this year so their investors won’t get taxed more heavily for the money next year. And experts believe the number of firms jumping on the early-dividend bandwagon is bound to increase.

“We’re going to see an avalanche,” said Howard Silverblatt, a senior index analyst with Standard & Poor’s. “It’s a no-brainer. If I’m a shareholder and you don’t do that, you’re going to hear from me.”

But the rush to pay dividends before the end of the year drew fire from one liberal-leaning tax reform group.

“This is just the masters of the universe taking care of each other,” complained Rebecca Wilkins, senior counsel at Citizens for Tax Justice, a Washington, D.C., research group that has been critical of corporate tax practices under current law. “It’s pure self-interest.”

While paying dividends early poses little financial problem for corporations, she added, it will be “detrimental to the U.S. Treasury.”

The fiscal cliff refers to the year-end expiration of 2003 legislation that cut taxes, reducing the rate for dividends from 38.6 percent to 15 percent. Unless Congress and President Barack Obama work out a compromise, the rate will rise again. And that change — coupled with a surcharge also set to go into effect in January to help pay for Obama’s health care law — would boost the dividend tax rate for the county’s highest earners to 43.4 percent, experts say.

As a result, Standard & Poor’s has seen a big jump in companies issuing dividends before the law runs out. Some have moved up the payment date of dividends that were scheduled for 2013. Others are awarding extra dividends, money not routinely issued to stockholders.

In November, 228 companies awarded “extra” dividends, compared with only 72 in November of last year. Silverblatt suspects many, if not most, businesses paying such dividends now were specifically avoiding the looming tax increase.

The trend doesn’t surprise officials at financial data firm Markit. In its recent survey of 100 public companies, 38 percent said they were likely to issue unscheduled dividends before the end of the year, in many cases because of the fiscal cliff. Many corporate investors fear the dividend tax will increase “even if a grand bargain is struck in Washington,” according to Markit Vice President Chaitanya Gohil.

Companies that have moved their dividend payments from 2013 to 2012 — or have announced an extra dividend before the end of the year — include Wal-Mart Stores Inc., Campbell Soup Co., Dillard’s Inc. and Ethan Allen Interiors Inc.

Oracle Corp. this week said it will make dividend payments of 18 cents per share in December — for its second, third and fourth fiscal quarters — that otherwise would have been paid next year. Oracle officials declined to discuss the decision. But they noted in a prepared statement that their biggest shareholder, CEO and board member Larry Ellison, didn’t vote on the matter. He reportedly will get nearly $200 million from the accelerated payments.

The board of Cisco Systems Inc. decided in November to pay a dividend of 14 cents per share on Dec. 19 that ordinarily would have been paid in January. Although the board didn’t reference the fiscal cliff in its announcement about the dividend, “the date changed because of the possible pending tax changes,” said Cisco spokeswoman Kristin Carvell.

It’s unclear how many other companies are doing or considering the same thing.

Among companies that do pay dividends, several — including Intel Corp., Hewlett-Packard Co. and Gap Inc. — said they haven’t announced any dividend changes. Others, including Apple Inc., Chevron Corp. and Wells Fargo & Co., declined to comment.

But Carl Guardino, CEO of the Silicon Valley Leadership Group, said he “would not be surprised” if more businesses chose to pay dividends this year instead of next, given worries about the fiscal cliff.

“Uncertainty makes people and businesses nervous,” he said. “Therefore, some might act now rather than wait upon the uncertainty of 2013.”