Long-term costs not fac­tored, ex­perts say


Austin American-Statesman - - BUSINESS - B

That’s be­cause a Jan­uary pay­ment may nearly triple the tax rate that the high­est earn­ers must pay on div­i­dends — to 43.4 per­cent from 15 per­cent, the rate in place since 2003.

If decade-old tax cuts are al­lowed to ex­pire at the end of this year, div­i­dends will be taxed like or­di­nary in­come, and the top rate for or­di­nary in­come will rise to 39.6 per­cent from 35 per­cent.

High earn­ers will pay an ad­di­tional 3.8 per­cent to off­set the cost of Pres­i­dent Barack Obama’s health care over­haul.

Obama and Repub­li­cans in Congress are fight­ing over whether the top rate for or­di­nary in­come should in­crease. Repub­li­cans would pre­fer that the div­i­dend tax re­main at 15 per­cent but have not taken a hard line on it pub­licly.

Be­tween Nov. 1 and Dec. 5, 349 com­pa­nies moved up their div­i­dends or paid spe­cial div­i­dends, ac­cord­ing to Sil­verblatt. That is higher than the 314 ir­reg­u­lar div­i­dends paid last year in all of Novem­ber and De­cem­ber.

Nor­mally, when a board de­clares a spe­cial div­i­dend, it’s a sign of fi­nan­cial strength, ex­perts say. That con­fi­dence can at­tract in­vestors and boost the com­pany’s stock price. But th­ese are not nor­mal times. With so many com­pa­nies declar­ing spe­cial div­i­dends, pro­fes­sional traders have a warn­ing for ev­ery­day in­vestors.

Peter Tchir, who runs the hedge fund TF Mar­ket Ad­vi­sors be­lieves some com­pa­nies are not con­sid­er­ing the long-term costs of their de­ci­sions. “Peo­ple should scour th­ese com­pa­nies and see if they’re do­ing some dam­age to them­selves on the credit side,” he said.

Many of the spe­cial div­i­dends, it turns out, are not drawn from the prover­bial moun­tain of cash that com­pa­nies have been sit­ting on since the on­set of the Great Re­ces­sion. Costco last month de­clared a spe­cial div­i­dend of $7 per share, or about $3 bil­lion. To pay for it, the com­pany bor­rowed $3.5 bil­lion. That caused Fitch, a rat­ing agency, to down­grade Costco, though its rat­ing re­mains rel­a­tively high. Costco de­clined to com­ment.

Tom Pem­ber­ton, of Pem­ber­ton Fi­nan­cial Plan­ning, says it’s not un­usual for com­pa­nies to pay ques­tion­able spe­cial div­i­dends to sat­isfy big share­hold­ers — es­pe­cially when they sit on the board. “If I’m a large stock­holder, I’m go­ing to say, ‘Hey, let’s go ahead and have a spe­cial div­i­dend,’ ” he said.

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