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Beware the special dividend Add to ...

Have you received a special dividend lately?

U.S. companies have been more than happy to open up their coffers, or even sell debt, to put together a one-time payment to shareholders – but investors might want to keep their gratitude in check.

The rash of corporate generosity, far from a reflection of confidence about the economy, is largely due to a concern that taxes on U.S. dividends are moving higher next year as part of the negotiations on the fiscal cliff.

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“The question is: Do you want to do a payout? And if you do, or you’re considering it, this is the last call at the bar,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

According to his numbers, an amazing 173 U.S. companies have issued special dividends so far in November, more than double the pace of November 2011 and well above any other November going back at least eight years.

This week, Costco Wholesale Corp. surprised the market with its announcement that it would distribute a combined $3-billion (U.S.) in special dividends to investors. That works out to be $7 a share, which dwarfs the regular quarterly dividend of 14 cents a share.

Earlier in the week, Las Vegas Sands Corp. announced a special dividend of $2.75 a share and Dillard’s Inc. announced a special dividend of $5 a share.

If you’re feeling particularly optimistic, you might chalk up the moves to a combination of strong management confidence and robust corporate cash levels.

However, looming tax increases and uncertainty might be a better explanation. U.S. taxes on dividends used to top-out at 15 per cent, but are likely to rise in the New Year.

Companies are trying to get ahead of this tax increase by paying out big sums in 2012. Other companies, such as Wal-Mart Stores Inc., have even moved up regular dividend payments from January to December to avoid the anticipated tax bump.

While regular investors get paid just like everyone else, it is interesting that many of companies rushing these dividend payments tend to be closely held, with a dominant shareholder who stands to benefit the most from such payouts.

Walton Enterprises controls 47.9 per cent of Wal-Mart. Evercore Trust controls 24.6 per cent of Dillard's. And Sheldon Adelson controls 51.5 per cent of Las Vegas Sands.

If you were to bet on which companies will be next to move up regular dividend payments or pay out special ones, closely held companies would be a good place to start. So would cash-flush, low-debt technology companies.

“But just because the door is closing doesn’t mean that they’re going to do it,” Mr. Silverblatt said.

The other issue here is whether investors should really be hoping for such payouts. Berkshire Hathaway Inc., the company run by Warren Buffett, does not pay a cent in dividends, special or otherwise – and Mr. Buffett said last year that the company would only pay a dividend when it has run out of investing ideas.

Sure, regular dividends can signal management confidence in their ability to pay the dividends every quarter and perhaps raise them every year – which is why dividend-paying stocks can be the bedrock of a well-constructed investing portfolio.

But special dividends signal no such confidence, and are therefore nothing more than a transfer from a company’s coffers to yours.

Indeed, by some indications, companies are downright nervous about the year ahead and what the global economy is going to look like with Europe in recession, China slowing down and the United States being held together by central bank stimulus.

In many ways, then, special dividends aren’t so special.

Follow on Twitter: @dberman_ROB

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