November 30, 2012 / 7:00 PM / 5 years ago

Walgreen, Apollo, among 40 special dividend candidates -analysts

* More than 30 special dividends announced this quarter

* Credit Suisse, Citi cite 40 more candidates

* Debt markets an attractive option to fund

By Caroline Valetkevitch and Ben Berkowitz

Nov 30 (Reuters) - Dozens of companies have declared special cash dividends ahead of potential tax increases next year, leading analysts to speculate on at least 40 more that might return large quantities of cash before the end of this year.

For shareholders of some of those companies, like drugstore chain Walgreen Co and for-profit education provider Apollo Group Inc, such a payout may turn into a welcome holiday surprise.

The problem -- or opportunity, depending on your point of view -- is the “fiscal cliff,” a combination of tax increases and spending cuts due to kick in at the beginning of 2013 if Congress and the White House cannot agree on a plan to reduce the federal budget deficit.

Without a solution, dividend taxes could more than double for some people. Especially for companies with heavy insider ownership, that has added a sense of urgency to deliberations around paying or raising dividends, which is why more than $10 billion is headed back to investors in coming weeks.

“People are preparing for a different tax regimen, and it makes sense. I think people can get carried away with this as well because we just don’t have the details on what the difference is going to be in capital gains taxes,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Already more than 30 companies have declared special dividends this quarter, according to Credit Suisse research, well more than in any year going back to at least 2000.

Some, like Las Vegas Sands and Guess, will largely go to insiders, though others like Costco will be distributed much more broadly.

Generally speaking, high levels of insider control are considered a good predictor of special dividends, although governance experts also frown on the implications.

“It always makes us suspicious when you have significant dividends being paid out to controlled companies,” said Paul Hodgson, chief research analyst at governance group GMI Ratings. “The very people making decisions whether to pay those dividends out are the ones most likely to benefit from them.”


In an attempt to predict what other companies might go the special dividend route, Credit Suisse put together a model that takes into account capital expenditures, research and development expenditures, interest expense, growth rates and the level of insider holdings.

The list runs the gamut of sectors, but it leans mostly toward consumer products and services, and financials.

Of the 41 companies Credit Suisse identified as likely to initiate a payout, 12 of them already have. Of those that have not, the five considered most likely are Walgreen Co, Public Storage, NVR Inc, Apollo Group Inc and John Wiley & Sons Inc.

A Walgreen spokesman declined to comment. Representatives of the other companies were not immediately available to comment.

Credit Suisse is not the only firm trying to predict the future. Earlier this week, Citi Research produced a list of 15 companies it considers likely to make a payout, based on insider holdings, cash on hand and leverage.

Citi did not score who was more or less likely to pay, as Credit Suisse did, although four companies did appear on both lists, including Walgreen.

In both cases, debt is a key factor. While many companies that have already declared dividends have the cash to fund them, some like Costco are taking advantage of cheap debt financing to pay them out instead.

November was the second-largest month for investment-grade debt since at least 1980, with issuance at more than $120 billion, according to the Thomson Reuters Investment Banking Scorecard.

“If they’re going to do it, they’ve got to do it fast. The window is shutting down fast,” said Fred Dickson, chief market strategist with D.A. Davidson & Co in Oregon. (Reporting By Caroline Valetkevitch in New York and Ben Berkowitz in Boston; Writing By Ben Berkowitz; Editing By Grant McCool)

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