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.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

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.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!