Buckle Could Set the Special Dividend Trend for 2010

Includes: BKE, QQQ, SPY
by: Stephen Rosenman

Could the Buckle be the trendsetter for 2010? Last year, Buckle broke with its usual pattern of raising dividends, instead opting for a gargantuan $1.80 special dividend. Why do that? If you are going to hand out a chunk of cash to shareholders, why not also boost the dividend?

I didn't sit in on the discussion, but it might have gone something like this:

  1. On January 1, 2011, the favorable treatment of dividends ends. Right now, dividends are taxed at a 15% rate making stocks with dividends extremely advantageous. Soon, that advantage disappears. If Congress doesn't extend the dividend tax break, we revert to dividends being treated as ordinary income. Dividends are set to be taxed at rates up to 39% in 2011.

  2. Insiders hold 46% of the stock. The company makes boat loads of money, far in excess of what they need for capex. The company had an operating cash flow of $144 million in 2008, for example, but only required $48 million in capex. In 2008 and 2009, they paid out large special dividends, $3.00 and $1.80 respectively.

  3. Insiders are usually in the highest tax brackets.

  4. Rather than boost the quarterly dividend, it makes better sense from a tax perspective to pay out special dividends. Why raise the quarterly dividend rate and commit yourself to paying higher taxes in 2011 and beyond?

  5. 2010 is the last year of a 15% tax rate on dividends. I predict the Buckle board will announce another special dividend in 2010. This time the dividend is likely to be far greater. Its design would be to drain all excess cash, giving shareholders, insiders and outsiders one last chance to pay a lower tax rate on their dividends.

This is going to be a major theme of 2010 and 2011. Investors have not yet factored in the profound changes that are about to take place in how dividends are taxed. Accountants that sit in on company board meetings are likely to apprise directors that they would be better off handing out one time dividends this year.

After 2010, companies with large insider holdings are likely to focus on growing their share price rather than increasing dividends. Long term capital gains will still be favorably taxed at 20% (rather than the current 15%). Companies without growth will resort to buybacks to boost EPS in the hopes of stock appreciation.

Therefore unless Congress does something fast, good bye to the quaint notion of dividend paying stocks. 2011, hello, buy backs, growth at any cost, anything but dividends.

The only thing I see can good about this is the likely rush to special dividends this year. Before January 1, companies should hand out as much excess cash as they can to their shareholders. Which ones will give the largesse? Look for companies with huge insider holdings and excess cash generation to announce massive special dividends. Management with large stock holdings will recognize that one time only payments make good tax sense. After all, why not hand it out this year and pay 15% rather than wait and get gouged at 39%?

Disclosure: Long BKE