US firms rush special payouts to beat tax hike

US companies are rushing to make huge payouts to shareholders before year-end to beat a tax increase on dividends expected to emerge from deficit talks under way in Washington.

Big-box discounter Costco became the latest firm Wednesday to set a dividend before December 31, promising a special cash payout of $3 billion, or $7 a share, on December 18.

On Tuesday Brown-Forman Corp., which makes Jack Daniels whiskey, declared a special cash dividend of $4 a share, to be paid on December 27; department store owner Dillard's set a $5 a share bonus dividend, and casino operator Las Vegas Sands said its board approved a special payment of $2.75 a share on December 18.

Other companies, including Walmart, the world's largest retailer, have moved forward their regular quarterly dividends from early 2013 to December in order to beat the expected year-end deadline for a tax change.

Verizon Wireless said earlier this month it would pay an $8.5 billion dividend to parents Verizon and Vodafone with a December 31 deadline -- just in time to beat the possible tax hike.

The tax rates on dividends and capital gains are widely expected to increase as a result of negotiations between Democrats and Republicans aimed at cutting the deficit over the long term.

Cut to 15 percent in 2003 from a top rate of 39.6 percent, the dividend tax has become a symbol of a tax system and economy that critics say favors the wealthy.

It was a key issue in the presidential election, during which President Barack Obama skewered his wealthy opponent Mitt Romney for paying taxes at one of the lowest rates. This was because much of Romney's tens of millions of dollars in income came from dividends.

Most expect the rate to be pushed back up to the same levels of income taxes -- as much as 35 percent, or more if the highest income tax rate is raised again.

That has encouraged a number of companies -- especially those like Dillard's, Walmart and Las Vegas Sands which are closely controlled by families -- to return cash to shareholders at a likely lower tax rate.

"We believe this special dividend is the best utilization of the company's strong balance sheet at this time... The company chose to make this payment in calendar 2012 because of the uncertainty surrounding future dividend tax rates," said Brown-Forman Chief Executive Paul Varga.

According to market research group Markit, special dividends are soaring this quarter, and it expects the normal average of 31 to surge to 120 or more.

It is not the first time, according to Markit: payouts jumped in December 2010 when it appeared that the dividend tax would rise at the beginning of 2011.

Markit pointed out that the payouts are more frequent when those deciding the payout control a bigger chunk of the company, as in Walmart.

"Markit believes that insider holdings are the key variable in projecting special dividends in this unique tax environment.

"Concentrated ownership at the executive and board level can more expeditiously push for one-time special dividends at the current favorable tax levels. Disparate groups of shareholders may not have the same influence."

Jon Ogg of 24/7WallSt said some tech companies loaded up with cash could also make the move for an advanced payout, including Apple, Yahoo!, Juniper Networks and Oracle.

"Larry Ellison and friends have a cash arsenal of more than $31 billion," Ogg said of Oracle's chief executive and key shareholder.

"By sending back half of that cash, Oracle could have a 10 percent special cash dividend and still have more than $15 billion on its books."

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