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Tickers in this Article: BF.B, CCL, MUR, COST
Friday, November 30, 2012

This morning's lackluster Personal Income & Outlays report for October shows that the economy may not be strong enough to withstand 'Fiscal Cliff' jolts. While some of the spending weakness in today's report likely reflected disruptions from Sandy, the trend wasn't looking that encouraging even in the third quarter GDP report on Thursday, where the consumption numbers were revised lower even as the headline growth number was revised higher.

Today's report shows 0.2% drop in consumer spending versus the unrevised 0.8% gain in September. Income growth was unchanged versus the 0.4% gain the month before. Overall, this is a weak reading of the consumer economy, but largely corroborates the soft same-store sales numbers we found from retailers on Thursday. GDP growth estimates for the fourth quarter have been coming down in recent days and this report will further accelerate that trend.  

Negotiations to resolve the 'Fiscal Cliff' issue don't seem to be making any headway at this stage, meaning that we are likely weeks away from something resembling a resolution. But the expected tax changes next year that any resolution will accompany, particularly on dividend tax rates, is prompting companies to speed up their scheduled quarterly dividend payouts and many are coming out with special one-time dividends.

Quite a few companies are going to the extent of issuing debt to finance the special dividend payouts. The special dividend announcements from Carnival (CCL), Costco (COST), Murphy Oil (MUR) and Brown-Forman (BF.B) would fall in this latter category. Bond investors are not thrilled with these debt-financed special dividends and the rating agencies are clamping down, but the trend doesn't seem to stopping.

Sheraz Mian
Director of Research
 
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