Will Dividends Become Sidelined By The Fiscal Cliff?

Includes: ARDNA, FIZZ
by: Stephen Rosenman

Back in January, I identified 2012 as the "Year Of The Special Dividend" and published a list of 7 stocks I predicted would announce special dividends this year.

The strategy worked: All but one of the stocks on my original list have handed out sizable special dividends.

Indeed, there has been a rush of companies announcing one-time payouts to take advantage of the 15% dividend tax treatment before it expires on December 31. To name a few - Wynn Resorts (NASDAQ:WYNN), Limited Brands (LTD), The Buckle (NYSE:BKE), Tyson Foods (NYSE:TSN), Atrion Corporation (NASDAQ:ATRI) - companies have been declaring large special dividends. Their boards realize this may be the last chance at making a tax-efficient dividend - they are squeezing as much cash as their balance sheets will allow into special dividends. After all, this year's dividend is taxed at a 15% rate. Next year, rates reach as high as 43%.

Two recent announcements:

1. National Beverage (NASDAQ:FIZZ), a soda company, announced a special dividend that will range between $1.50 to $3.00. The exact amount will be decided by November 30. The special dividend will go to shareholders this year unless the "Administration" (FIZZ's words) extends or modifies its position relative to current tax on dividends, in which case the company may deliver the payment in February 2013. National Beverage entitles the announcement "Foregone Tax Rates Stimulate Shareholder Payback!"

Although FIZZ announcements can be a bit wacky, this one is particularly significant: The company states its dividend policy and timing will depend on tax policy. Not many boardrooms have been so candid on how the tax change will affect corporate finances.

FIZZ has $46 million in cash on its balance sheet. Yet, it is sending $69 to $138 million out to shareholders. You've got to wonder where the extra dough is coming from.

2. Arden Group (NASDAQ:ARDNA), a supermarket operator, is giving a $20 special dividend, about a 20% dividend rate. Arden has been accumulating cash since its last special dividend (2008). The announced $61 million special dividend will deplete a huge chunk of Arden Group's $76 million cash position. CEO Bernard Briskin owns 43% of the company, making his share $26 million. By opting for a special dividend in 2012 rather than 2013, he may save $7 million in taxes.

Bottom Line

The end of the 15% dividend tax treatment has prompted a number of cash-rich companies to announce large special dividends. This may be the last year companies announce special dividends.

Even more concerning - will dividends become sidelined by heavier tax treatment? Should dividends become taxed as ordinary income, how will corporate boards return company profits to shareholders?

If I were on a corporate board, I'd steer clear of a 43% taxed dividend and look for another way to return profits to shareholders. Buybacks are the logical but unappealing alternative. The thinking: By decreasing share count, buybacks increase earnings per share. The hope: The shares appreciate in value, creating more favorably taxed long-term capital gains. Companies are already considering that shift away from dividends. J.M. Smucker (NYSE:SJM) for one has said its dividend policy will hinge on the outcome of tax policy.

Clearly, there's a lot of uncertainty in today's market around the fiscal cliff. So we'll continue to evaluate where we head in terms of that mix between buyback and dividend.

Will 2012 mark the end of preferential dividend tax treatments? In 2010, we came pretty close to the dividend tax cliff and Congress blinked. Stay tuned. We may get another reprieve.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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