What is an Accelerated Dividend?
An accelerated dividend is a special dividend paid by a company ahead of an imminent change in the treatment of dividends, such as an adverse change in dividend taxation. Companies will also sometimes pursue an accelerated dividend strategy to drive growth by sending a signal to investors that the company is making more money than it knows what to do with.
- An accelerated dividend is when futures dividends are paid in a lump sum instead of steadily over time.
- Companies may issue accelerated dividends ahead of a tax policy change in an attempt to minimize the shareholder's tax bill on the dividends.
- In both the U.S. and the U.K. there have been examples of companies paying out large dividends before taxation changes.
Understanding the Accelerated Dividend
Accelerated dividends from U.S. companies came to the forefront in the fourth quarter of 2012. During that period, numerous companies expedited dividend payments ahead of the Dec. 31, 2012 expiration of the preferential 15-percent tax on dividend income instituted by former President George W. Bush in 2003. The concern was that because of the fiscal cliff, the dividend tax rate could more than double for taxpayers in the highest income bracket.
U.S. companies scrambled to pay accelerated dividends in the fourth quarter of 2012, with total special dividend announcements exceeding $31 billion, an increase of more than four times the dividend payout made in the year-earlier period. In November 2012 alone, 228 companies announced special dividends, a more than three-fold increase from the 72 companies that did so a year earlier.
In 2016, the United Kingdom introduced a new tiered dividend taxation system. This too led to accelerated dividend payments by many public and private companies.
Accelerated Dividends Paid by U.S. Companies in December 2012
Many companies went to great lengths to minimize the potential tax bill to their shareholders. Some tactics included consolidating future dividend payments into one payout and taking on debt to pay accelerated dividends.
Fears that the tax rate on dividends could soar from 15 percent to over 40 percent for high-income taxpayers subsequently proved to be unfounded. Thanks to a last-minute fiscal cliff deal signed in January 2013, the top marginal tax rate on dividend income was set at 20% for taxpayers with adjusted gross income of more than $200,000, or $250,000 if married and filing jointly.
Other Reasons for Accelerated Dividends
When a company pays out a large dividend, this is also called a special dividend. Such a dividend may be tied to the sale of an asset, or the company may have lots of cash and decides to funnel it back to shareholders.
If the company restructures or implements innovations that will save the company a considerable amount of money, some of those saving (resulting in greater profits) may be passed along to shareholders in the form of a dividend.
Real-World Examples of Accelerated Dividends
Seaboard Corp. (SEB) accelerated its $3 annual dividend for the 2013 to 2016 period and made a single consolidated dividend payment on December 28, 2012.
Oracle Corp. (ORCL) accelerated its dividend payments for the first three quarters of 2013, consolidating its quarterly dividend of $0.06 per share into one payment of $0.18 paid on December 21, 2012. Oracle CEO Larry Ellison, who owned 1.1 billion Oracle shares at the time, received close to $200 million from the accelerated dividend payment, saving over $50 million in federal income taxes.
Costco Wholesale Corp. (COST) paid out a special dividend of $7 per share for a total of $3 billion and funded it by taking on $3.5 billion in debt.