Special Dividends, Especially When Funded with Debt, Benefit Insiders More Than Shareholders (COST)

As the so-called fiscal cliff approaches, companies have been shoveling out dividends to help investors avoid enormous potential tax increases. But are the companies’ intentions truly in the best interest for the shareholders?

Cliff Approaching?

With the threat of the possible fiscal cliff tax increases, many companies have been paying early dividends as well as offering investors special dividends. If the tax increases do occur, the taxes on dividends could increase by over 60% from the current tax rate of 15% to a tax rate of over 40%, depending on investors’ tax brackets.

Many companies that previously planned to pay dividends in January or later, are now paying out their dividends in December, saving their shareholders from the drastic potential increase in dividend taxes. Regular dividends for many companies have been pushed up to help shareholders, but there have also been several companies who, in addition to moving up regular dividends, are paying special dividends as well.

Who Really Benefits?

We’ve seen a record 100+ companies join the new special dividend trend, including The Walt Disney Company (DIS), Guess, Inc. (GES), Las Vegas Sands (LVS), and Wynn Resorts (WYNN). These companies’ largest shareholders, often founders or the families of founders, will benefit the most from these payouts (since they own the most shares).

Most recently, Costco Wholesale Corporation (COST) has been stirring up its share of controversy. The company reported it will be paying a $7 per share special dividend on on December 18, to shareholders of record on December 10. However, the company also reported that they will be borrowing over $3 billion to pay for this special dividend. That’s the full amount the company intends to pay out. It will have to pay back that money to lenders, plus interest.

In theory, a dividend, especially a special dividend is extra cash a company has in which they decide to distribute back to their investors. The idea of borrowing money in order to pay a dividend, which the company has no obligation to pay, does not make sense.

However, if you take a closer look at the shareholders, you will realize that most of the company shares are owned by insiders. Ironically, COST’s co-founder Jim Sinegal will cash out from their special dividend with his ownership of 2 million of the company’s shares. At $7 per share, Sinegal will make an exceptional profit from this dividend, at the company’s expense.

Although other companies are actually using money that they already have to pay these special dividends, Costco is not the only company where insiders benefiting excessively. Sheldon Adelson, founder of Las Vegas Sands will profit from over half of LVS’s $2.2 billion special dividend which will be paid next week. Additionally, the Marciano family will see a large cash flow from Guess, and the Walton family will benefit from Wal-Mart’s early dividend, as well as their stake in Wynn Resorts.

Although offering early dividends and special dividends prior to the fiscal cliff will help regular shareholders avoid high taxes, the outrageous special dividends have the greatest benefit to the insiders.

Costco shares were down 85 cents, or -0.84% during Thursday afternoon trading.

Costco Wholesale Corporation(COST) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.4 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

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