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Special dividends: naughty or nice?

Friday, Nov 30, 2012 - 02:27

Nov. 30 - Hundreds of companies are planning to distribute special dividends this year in order to avoid possible tax rate hikes next year, but are these payouts in the best interest of shareholders? Conway G. Gittens reports.

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Whole Foods is doing it...so is Costco. And according to Standard and Poor's nearly half of all S&P 500 companies are preparing to pay out dividends, and the number is growing by the hour. Companies are either giving shareholders a special end-of-the-year dividend or moving up scheduled dividends in order to avoid a possible spike in tax bills next year, due to the fiscal cliff. Tom Lee of JP Morgan thinks these dividends are a great idea. SOUNDBITE: TOM LEE, CHIEF U.S. EQUITY STRATEGIST, JP MORGAN (ENGLISH) SAYING: "The reason you own stocks is to own stocks for dividends and for capital gains and getting a large dividend is very good. In fact, most people will reinvest that special divided, which means that it actually ends up helping the stock over the long run because obviously if you're getting paid a hundred dollars in dividends and it's being reinvested it's going to push up the stock price." Number crunchers at Credit Suisse say on average companies announcing a special dividend outperform the broader market in a trend dating back to the year 2000. Research analyst Pankaj Patel: SOUNDBITE: PANKAJ PATEL, GLOBAL HEAD QUANTITATIVE RESEARCH, CREDIT SUISSE (ENGLISH) SAYING: "Announcement day we do see a pop of one percent compared to the benchmark, so it does give a boost to the stock, when they announce and then if you look for the next one month, or about 21 trading days, they still go further 1.2 percent higher than the benchmark. So there is that increase in return of the price appreciation comes when the companies do that." But there are critics who say the payouts could be better used putting Americans back to work or investing in upgrades. S&P 500 companies are sitting on a one trillion dollar stockpile, according to calculations by Thomson Reuters of Q3 cash, and Standard and Poor's is expecting a record $278 billion of that to be shelled out before the tax man cometh. But Lee says companies have little choice in cash usage given the current economic and fiscal climates. SOUNDBITE: TOM LEE, CHIEF U.S. EQUITY STRATEGIST, JP MORGAN (ENGLISH) SAYING: "We do want a portion of it to be invested in capital spending or to buy back stock, but we also know companies that if they don't have a lot of projects in front of them, it's a misuse of cash to just buy plant and equipment that they just don't need." But buyer beware; most professionals say don't go chasing after dividend paying stocks because the scope and size of these dividend payments could be a once in a lifetime event.

Special dividends: naughty or nice?

Friday, Nov 30, 2012 - 02:27

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