Economic theorists warn that fiddling too much with tax policy provides incentives for market participants to devote time and energy to managing their tax exposure, as opposed to going about the productive work that generates that taxable income. The last few weeks have suggested that those theorists are onto something, as a variety of companies make moves designed to end-run the upcoming changes in tax policies tied to the fiscal cliff.
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Many companies, including Costco (Nasdaq:COST), have announced special dividends to be paid ahead of the year-end as a means of transferring more cash to shareholders before taxes on such distributions increase significantly. Now a host of companies are making slightly less dramatic, but still significant, changes to the timing of their dividend payments in order to avoid at least some of the effects of the fiscal cliff.
How Often Do Oracle, Disney and Walmart Travel Together?
It's interesting to peruse the list of companies that have announced accelerated dividend payments, as companies like Disney (NYSE:DIS), Coach (NYSE:COH), Walmart (NYSE:WMT) and HCA Holdings (NYSE:HCA) don't otherwise show up in the same articles very often. In all cases, these companies are moving regularly scheduled dividend payments from January 2013 into December 2012 of this year.
The reason for this change is pretty simple - avoiding taxes. Given that Congress and the White House seem unable to reach a compromise on the so-called "fiscal cliff" issues, it seems quite likely that the anticipated changes to the dividend tax policy will go into effect on Jan. 1, 2013. With that, the tax on dividends will move from 15% for most shareholders to the same level as ordinary income tax (up to nearly 40%). Making matters worse, a new additional tax tied to paying for the Affordable Care Act ("Obamacare") will add as much as 3.8% to the dividend tax bill for certain individuals.
Oracle Takes It a Step Further Than Most
Several companies have announced special dividends ahead of the expected tax increase, and many others have decided to accelerate their next dividend payment by a month or two. Software giant Oracle (Nasdaq:ORCL) is going a step further than most, though, and accelerating multiple payments.
Instead of accelerating just one dividend, Oracle is advancing its fiscal second, third and fourth quarter dividend payments into December of this year. In essence, most of the next years' worth of dividends is going to come to shareholders this month. With a record date of December 14, that makes the upcoming ex-dividend date of December 12 even more important - shareholders need to buy Oracle shares ahead of December 12 or face a long wait for the next dividend payment.
Odds are this will have minimal impact on the business. While the 18 cents per share in accelerated dividend payments will lead to a cash outflow of over $850 million, I highly doubt that this move will impair Oracle's ability to do additional cash deals if the company so wishes, particularly with short-term borrowing rates so low.
As an interesting side-note, Oracle's press release said that Larry Ellison, the very wealthy owner of almost one-quarter of Oracle, did not participate in the deliberations or vote on this dividend move. Given that this move will save him tens of millions of dollars in additional taxes, it's not hard to see why the board likely thought this was an important deal to mention, as the apparent conflict of interests is not trivial.
The Bottom Line
To be sure, these dividend accelerations do not represent meaningful disruptions to the businesses involved, but it is nevertheless an example of how economic entities will always pursue their perceived self-interest in the face of changing tax policy. While events like the fiscal cliff are admittedly rare, the disruptions we've seen to corporate planning, spending and capital policy since the summer of 2012 offer a good case-in-point as to why the government should avoid big shifts in tax policy as a matter of course.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.