Possible tax hikes spur special dividends

Companies from Wynn Resorts Ltd. to IDT Corp. are paying special dividends at four times the pace of last year, helping investors stay a step ahead of the tax man with rates poised to jump in 2013.

From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared a onetime cash payment to shareholders, up from about 15 in the year-earlier period, according to data compiled by Bloomberg. More than a dozen said they acted because of a pending dividend-tax increase.

Congress is poised to let the rate on dividends, which was lowered to 15 percent during the George W. Bush administration, increase after President Obama won a second term on a pledge to exact more revenue from top earners.

"It's a foregone conclusion the rates are going up - it's just a matter of how high they go," said Todd Lowenstein, a Los Angeles-based money manager with HighMark Capital Management Inc. "When you know that 15 percent tax rate is going away and you have excess cash buildup, it makes sense to return some of it back to shareholders now."

If Congress takes no action, the dividend tax will revert to the ordinary income rate, which tops out at 39.6 percent. Companies, which according to data compiled by Bloomberg are sitting on $3 trillion of cash, can afford to give back to shareholders and create some goodwill by showing they're attuned to possible higher taxes, Lowenstein said.

It worked for Commerce Bancshares Inc., of Kansas City, Mo. Happy shareholders called and sent e-mails immediately after the bank declared a $1.50 a share onetime payment on Nov. 2, its first-ever special dividend.

"They weren't asking for it beforehand, but they certainly were thanking us for it afterward," said Charles Kim, chief financial officer of the bank. About half of its shareholders are retail investors, and "it's very likely for a good portion of our shareholders their tax rates on dividends will be going up."

In the Philadelphia area, Omega Flex Inc. declared a $1-a-share special dividend on Dec. 14, citing the "benefits of the current dividend tax treatment."

IDT, a Newark, N.J., provider of prepaid mobile-phone calling cards, went a step further, pulling some of its dividend for next year into this one. The company canceled its 15-cent quarterly payout for the rest of the fiscal year that began in October and instead paid a 60-cent special dividend this month to lock in the lower tax rate.

The calendar is influencing even the payment of regular dividends. On Monday, Wal-Mart Stores Inc. moved the payment of its fourth-quarter dividend to Dec. 27 instead of the previously scheduled Jan. 2.

"Wal-Mart's board recognized that there are complex fiscal and federal tax rate issues that may not be resolved in the next few weeks," Randy Hargrove, a spokesman for the Bentonville, Ark.-based retailer, wrote in an e-mailed statement.

Raising the tax rate will steer companies away from dividends and may ultimately reduce government revenue, Steve Wynn, chief executive officer of Las Vegas-based Wynn Resorts, told analysts and investors in an Oct. 24 conference call. Wynn Resorts declared an $8-a-share dividend, including the regular 50-cent quarterly amount, payable on Nov. 20.