The last few weeks have stirred quite the conversation about dividends, specifically paying them out in a lump sum or accelerating them before the year comes to a close. This change in corporate behavior has been forced upon due to the lack of clarity on tax policy, i.e. the fiscal cliff issue. I suppose it’ll get resolved without much of the winners being able to gloat, but these rushed up payments of dividends is a front burner issue. Why so much? Why so soon? Corporations may be sniffing out tough changes for dividends and taxes for investors.
Whatever the case, we know who is benefiting from this deed – INSIDERS AND MAJOR SHAREHOLDERS! Is it fair to distribute such large sums? Sure, why not? The pattern seems clear, too: Those on the boards of these companies with a significant stake (see: LVS, WYNN, COST as a few). Owners are entitled to the cash in the bank whenever they wish, and perhaps companies see it better to return excess cash to shareholders rather than investing in growth. Certainly those insiders who own major share amounts will benefit if a change in tax policy follows in 2013 (as promised). Is it wrong to pay out dividends? For years may investors complained about Apple’s policy to hoard their cash, and when it finally exceeded 100 billion they relented – paying a special dividend and instituting a regular quarterly dividend payout.
What’s interesting is the timing and usage of these payouts now. I don’t recall we have ever seen such a rush to return cash to shareholders. Coincidentally it is not unlike special payouts/bonuses to management. Witness what happened at Hostess recently (and others), who paid out substantial amounts just prior to filing for bankruptcy (yes, they knew this would happen).
Related? Somewhat. What we need to consider here is the timing of the action. We’ll always see these firms serving to benefit the owners and management- We cannot trade and handicap these events accurately nor speculate on future moves, rather just trade accordingly and how the markets perceive such events.
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