Five Reasons Companies Aren’t Accelerating Dividend Payouts

The last time the expiration of the Bush tax cuts on dividends loomed, very few companies chose to make their regular quarterly payment to investor...
Vincent RyanNovember 13, 2012

For Leggett & Platt, moving up its fourth-quarter dividend payment to December 27 from its usual January date was not a tough decision.

If the Bush-era tax cuts on stock dividends expire, the dividend tax rate for individuals will climb to as high as 43.4% on January 1, 2013 (including the maximum 3.8% health-care tax). The publicly held company, which has increased its dividend every year for 41 years, didn’t want its stockholders to be giving the U.S. government more than the 15% chunk of earnings they now pay.

“Given the significant pending increase of the federal tax rate on dividend income in 2013, the company opted to accelerate payment into December,” Leggett & Platt said in a press release on November 8.

“It was a fairly easy decision and no cost,” says David DeSonier, senior vice president of strategy and investor relations at the maker of mattress springs and residential furnishings.

Leggett & Platt did have to check on administrative and compliance issues first, says DeSonier. The New York Stock Exchange requires a minimum number of days between the dividend-announcement date and the record date (the date that holders who will receive a dividend distribution are determined). In addition, the transfer agent requires a period of time between the record date and the dividend-payment date, so that “they can get all their information lined up and make sure they are paying the right people,” says DeSonier.

After checking that accelerating the dividend wouldn’t cause problems for the NYSE or the transfer agent, Leggett & Platt went ahead with the change. Yet as easy as that decision was, so far only a handful of companies have announced accelerated cash payments in 2012.

In late 2010, when the Bush tax cuts were first set to expire, a similar situation occurred. An academic study, “What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses to Dividend Tax Rate Changes,” estimates that only 26 firms, with $1.69 billion in dividends, shifted their January 2011 dividend to December 2010.

Uncertainty around investor-level dividend taxation ended on December 17, 2010. That’s when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law, note the paper’s authors, Michelle Hanlon of the Massachusetts Institute of Technology and Jeffrey Hoopes of the University of Michigan. The law extended the 15% ceiling on dividend tax rates to this year.

Companies might not elect to pay their cash dividends a little earlier for a number of reasons, says Joseph Perry, partner in charge of tax and business services at Marcum LLP, an accounting and advisory firm. He lists five:

1. Year-end profit. The company may not know what its year-end profit is going to be, and the board may not want to approve a dividend payout until then.

2. Cash flow. Highly cyclical businesses may not have the cash to pay out and don’t want to borrow against future cash flow.

3. Consistency. A lot of dividends report quarterly, and to the extent a company misses a quarter it interrupts consistency. So a company accelerating the distribution will not be able to claim “X” uninterrupted quarters of dividend payouts. (That’s because there would be no distribution in the first quarter of 2013.)

4. Regulatory approval. A company in a regulated industry may need approval, especially if there is a holding company and it has to “dividend up” from one entity to another.

5. Institutional distribution. Depending on how many shares are held by institutions, a company may decide against an early dividend payout. Institutions will not be subject to the 3.8% health-care tax surcharge that would be part of the 43.4% maximum, for example.

In addition, pension funds and 401(k) plans defer taxes, hedge funds and money managers are evaluated on pretax performance, and nonprofits and some corporations have exemptions from dividend taxation.

Even if they decide against a cash payout, public companies could still help investors lessen the impact of a tax increase, notes Perry, by issuing the dividend in stock. Since a stock dividend is not taxed until the shares are sold, investors can defer taxes until then.

“The long-term [capital] gains rate might be higher than it is today, but it will not be subject to the highest individual rate of 39.6%,” according to Perry. But shareholders would still take a small tax hit later on if they sell the shares for a gain. President Obama has proposed raising the capital gains rate to 20%.