Goldman Sachs, as it often is, was right. Back in the third quarter the famed investment bank said circumstances – US companies flush with cash and a coming tax change – “augur a wave of special dividend announcements” in the fourth quarter.
According to the Wall Street Journal, in the past two weeks alone at least four Standard & Poor’s 500 companies have announced special payouts, including a recent $750mn payout by casino operator Wynn Resorts, a $1.1 billion dividend from hospital operator HCA Holdings and a $1.6 billion dividend from LyondellBasell Industries NV, a New York-listed chemicals group.
If the numbers continue to climb, it will be a banner year for dividends. In the third quarter, 439 companies raised their dividend vs. 350 in the same quarter in 2011, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Corporations are definitely socking away more cash than ever before. Even amid an earnings season lackluster at best, JPMorgan says cash balances of S&P 500 companies has surged 14 percent to about $1.5tn. This, combined with the expiration of a temporary dividend tax break the end of the year, which will raise the rate to 43.4 percent from 15 percent, is causing many companies to give a little money back to investors.
And after the new year what will companies do? Likely keep going on stock buybacks.
According to Alex Bryan, Fund Analyst at Morningstar, “because dividend tax rates would exceed capital gains tax rates for most investors, share-buyback programs become a more tax-efficient method for companies to distribute cash to their shareholders.” He added that although it was “unlikely that companies will cut their dividends to improve tax efficiency, [the coming tax change] creates an incentive for them to increase their share-buyback programs in lieu of raising their dividends to distribute excess cash in the future.”