Winners and ‘Losers’ of the Special-Dividend Bonanza

As you’ve probably heard by now, if no deal is reached before Dec. 31, America will go over the “fiscal cliff,” which features big cuts in government spending and a series of tax hikes. Among the levies set to go higher (much higher) are taxes on dividends, where the effective rate would rise to 43.4% for top taxpayers vs. the current Bush-era rate of 15%.

In an effort to preempt such a steep hike in dividend taxes, hundreds of companies have either issued “special” dividends in recent weeks or accelerated dividends originally set to be paid in 2013.

The special-dividend bonanza has been a huge windfall for some corporate insiders, notably company founders such as Oracle’s Larry Ellison, who “saved” a staggering $76.9 million in taxes by taking a dividend this month rather than last month. (The numbers in the accompanying slideshow are calculated based on SEC filing data and shareholders' summaries from Morningstar, as of Dec. 6.)

Clearly there’s an economic incentive for corporations to pay the dividends now vs. taking the risk of a big tax bill later. On the surface, there’s no downside to paying special dividends or accelerating 2013 payments into 2012 – no “losers” in this scenario.

But as my colleague Michael Santoli writes:

The very fact that these companies had stashes of cash sitting on the books that were apparently not needed to run the business, and not earmarked for future growth efforts, raises the question of why the boards weren't paying regular dividends at a higher rate all along, or at least buying back more stock. This underscores one way that family-steered public companies are often too conservative with capital structure and miserly with cash that rightly belongs to all investors. More conceptually, these companies are implicitly telling individual shareholders that their cash can probably get a better return in, say, tax-shielded municipal bonds than by remaining invested in their business.

Taking a (populist) step beyond that, the special tax bonanza also reveals, once again, the folly of calling some companies “public” or “shareholder owned” – unless you’re taking about the insiders, founders and their heirs. Citing Markit, CNBC reports companies paying accelerated or special dividends have an average insider ownership of 27 percent — higher than the broader market.

“There's a school of thought that says managers should return capital to shareholders much more often than they do, in part to avoid spending that money on ill-advised strategies,” says Sydney Finkelstein, a management professor at Dartmouth’s Tuck School and author of Why Smart Executives Fail and Think Again. “One could also argue that they are maximizing shareholder value by paying special dividends, since taxes are likely to go up.”

“Having said all that, it sure looks like insiders are trying to maximize their personal wealth,” he says.

At the end of the day, the avalanche of special dividends is another reminder of a reality that’s so obvious most folks don’t even notice it: Many companies – including some blue-chips – exist largely to serve the interest of a select few individuals, rather than the employees or minority shareholders, much less the community at large.

*Siemond Chan contributed to this report

Miriam Adelson

Las Vegas Sands Corp. (LVS)

Owner of 289,629,870 shares

Dividend: $289,629,870

After 15% tax: $246,185,389

After 39.6% tax: $162,192,727

Saving: $83,992,662

 

 

 

 

Larry Ellison

Oracle Corporation (ORCL)

Owner of 1,105,234,580 shares

Dividend: $265,256,299

After 15% tax: $225,467,854

After 43.4% tax: $148,543,527

Saving: $76,924,327

 

 

 

 

 

 

Sheldon Adelson

Las Vegas Sands Corp.

Owner of 146,955,404 shares

Dividend: $146,955,404

After 15% tax: $124,912,093

After 43.4% tax: $82,295,026

Saving: $42,617,067

 

 

 

 

Michael Dell

Dell Inc. (DELL)

Owner of 243,349,682 shares

Dividend: $77,871,898

After 15% tax: $66,191,113

After 43.4% tax: $37,067,023

Saving: $29,124,090

 

 

 

 

 

Joe Ricketts

TD Ameritrade Holding Corporation (AMTD)

Owner of 62,488,814 shares

Dividend: $31,244,407

After 15% tax: $26,557,745

After 43.4% tax: $17,496,867

Saving: $9,060,878

 

 

 

 

Steve Wynn

Wynn Resorts Ltd. (WYNN)

Owner of 10,026,708 shares

Dividend: $20,053,416

After 15% tax: $17,045,403

After 43.4% tax: $11,229,912

Saving: $5,815,491

    

 

 

 

 

Jim Walton

Wal-Mart Stores Inc. (WMT)

Owner of 10,499,215 shares

Dividend: $16,693,751

After 15% tax: $14,189,688

Saving: $4,841,188

 

 

 

 

Michael Duke

Wal-Mart Stores Inc.

Owner of 1,086,397 shares

Dividend: $1,770,778

After 15% tax: $1,468,265

After 43.4% tax: $967,327

Saving: $500,938