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Special Dividends Soar On Fiscal Cliff, Sluggish Prospects

With little reason to invest, firms are rushing to pay special dividends ahead of the fiscal cliff's potential tax hikes, and top cash hoarders like Apple may be next.

Costco (COST) became the latest to announce an extraordinary payout when the warehouse retail giant said Wednesday it would give shareholders $7 a share — about $3 billion. (See also The Income Investor) Casino giant Las Vegas Sands (LVS) and gun maker Sturm Ruger (RGR) are paying extra dividends too.

As of Wednesday morning, 173 companies had announced special payouts in just November, according to a tally by Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

That's up from 54 companies in October and 72 companies in November 2011. The year-to-date total already tops the number seen in all of 2011.

"If you're even considering" a special dividend, Silverblatt said, "it is the last call at the bar.

The current 15% tax rate on dividends could jump to 43.4% for top earners next year, unless lawmakers act before Dec. 31 to avert the so-called fiscal cliff of automatic tax hikes and budget cuts. The top dividend rate will almost certainly rise somewhat due to new ObamaCare taxes.

In addition to the surge in special dividends, the year-end deadline has prompted companies like Wal-Mart (WMT) to move up the payday on their regular dividends.

Walt Disney (DIS) late Wednesday hiked its annual dividend by 25% to 75 cents a share, payable Dec. 28. The prior annual payout was made on Jan. 18, 2012.

So far, most companies announcing extra payouts have been smaller, but Silverblatt expects more big-cap firms to follow suit in the next few weeks.

Analysts are looking to heavyweights like Microsoft (MSFT) and Apple (AAPL), which has more than $120 billion in cash reserves and already pays a regular dividend, to come next.

While this month's surge in special dividends has been dramatic, some companies may have been planning to return extra capital to shareholders anyway and could just be accelerating the timing, Silverblatt said.

Others continue to face the same cloudy economic and policy conditions that led them to accumulate cash in the first place and aren't any readier to part with it now.

"Companies are not willing to spend," he said. "There's still enormous uncertainty.

Indeed, some firms are using historically cheap debt to finance dividends. That allows them to avoid interfering with normal cash flow but still support their stock prices or reward shareholders, Silverblatt added.

The special dividends could be a byproduct of companies exploiting low corporate borrowing costs but not the main reason for issuing bonds, said Jack Ablin, chief investment officer at BMO Private Bank.

In some cases, firms with extensive international operations are reluctant to repatriate cash to the U.S. and pay high U.S. corporate taxes on it, so they issue debt to finance dividends.

Costco sold $3.5 billion in debt on Wednesday as part of a November boom in corporate bond sales.

While the looming fiscal cliff provides a near-term catalyst, companies have been hoarding cash for a reason. "They don't see a real purpose for expansion," he said.

U.S. and global economic growth is expected to stay tepid in 2013. The Organization for Economic Cooperation and Development on Tuesday said U.S. GDP would expand 2% next year, down from its prior forecast of 2.6%. The OECD expects the eurozone to contract 0.1%, vs. its old forecast for a 0.9% gain.