Seeking Alpha
Value, long-term horizon, dividend investing, dividend growth investing
Profile| Send Message| ()  

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Fiscal Cliff Hangover

A year ago, Congress was embroiled in the debate over whether to extend the favorable tax rates on dividends and capital gains, which were set to expire at the end of 2012. The looming prospect of higher taxes, which included other items in the tax code, was referred to as the Fiscal Cliff and, understandable, was producing great anxiety among many taxpayers, including investors, who faced the prospect of paying "ordinary" taxes on such income. As politicians often do, our representatives seemed bent on putting off a decision until the last possible minute, leaving us all with uncertainty about whether to make any changes to our portfolios. (A similar process in 2010 had resulted in a two-year extension of the tax rates, but an agreement was reached in early December.)

In fact, Congress went past "the last minute" and 2012 ended without an agreement, which finally came in the first days of the New Year. By then, of course, it was too late for corporations and individuals to take steps to alter their approach to dividends and capital gains. Some individuals sold stocks before 2012 ended, so that they could count on their gains being taxed at "only" 15%, while others may have sold or avoided dividend-paying stocks that they otherwise would have continued to own. And some companies, seeking to help their shareholders avoid a tax "hit," decided to accelerate dividend payments that would otherwise take place in 2013.

No Good Deed Goes Unpunished

As we now know, Congress finally reached an agreement during the New Year holiday to make the 15% rate on dividends and capital gains permanent, except for "high income" taxpayers, who would owe 20% (plus a 3.8% surcharge). But some damage caused by the Fiscal Cliff debate (and failure to reach a resolution on a timely basis) may be irreparable. In what qualifies as the Law of Unintended Consequences, there may be repercussions that will last for years, only showing up initially as 2013 draws to a close. Those repercussions are a direct result of corporations going out of their way to help their shareholders by making early (and extra) dividend payments that are bound to distort the dividend records shown by many databases, which blindly accumulate payments by date.

If you're not a dividend-focused investor, you might think that the issue is negligible. But for those focused on dividends - particularly rising dividends, you will face widespread distortions in many of the database listings of dividends by year, and that will make your task of choosing Dividend Growth stocks a lot harder. By accelerating a first-quarter 2013 dividend into December 2012, Boards of Directors may have been helping their shareholders, but the effect is that databases will show 2012 with five payments, compared with only three in 2013. So many companies will appear to have "cut" their dividends, while others may even appear to have eliminated them.

Lingering Side Effects

In the table below, I'm listing 48 Dividend Champions, Contenders, and Challengers that accelerated at least one dividend from 2013 into 2012. (Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. "CCC" refers to the universe of Champions, Contenders, and Challengers. The latest spreadsheet can be found here). What should be alarming is that while the companies below represent about 10% of the CCC "universe," they don't include the broader array of dividend-payers in the stock market, many of which may have paid accelerated dividends in December 2012. In other words, this may only be the proverbial "tip of the iceberg." There may well be hundreds of other companies that will suffer from "Fiscal Cliff Syndrome."

Note that while most of the companies below paid five dividends in one year and three in the other, there are a few variations, such as semi-annual payers, as well as some more extreme cases. For example, the Board at Landstar System (LSTR) decided to pay all of its 2013 and 2014 dividends a year ago, and Texas Pacific Land Trust (TPL) pays Annual dividends, so two payments were crowded in 2012, whereas none were paid in 2013. In these cases, the decrease in dividends is 100%, but their shareholders know that their companies did not actually cut the dividend rate. In fact, dividend increases were built into the early payments. The second set of numbers shows the adjustment that reflects a "normal" payment schedule.

Company

Ticker

No.

Unadjusted

Unadjusted

Pct

Adjusted

Adjusted

Pct

Name

Symbol

Yrs

2012

2013

Change

2012

2013

Change

A. Schulman Inc.

(SHLM)

6

0.9400

0.5900

(37.2)

0.7450

0.7850

5.4

ABM Industries Inc.

(ABM)

46

0.7300

0.4500

(38.4)

0.5800

0.6000

3.4

Acme United Corp.

(ACU)

10

0.3500

0.2300

(34.3)

0.2800

0.3000

7.1

American Water Works

(AWK)

6

1.2100

0.8400

(30.6)

0.9600

1.0900

13.5

AmTrust Financial Svcs

(AFSI)

8

0.4051

0.3818

(5.7)

0.3141

0.4727

50.5

Atlantic Tele Network

(ATNI)

16

1.1900

0.7700

(35.3)

0.9400

1.0200

8.5

Bank of Utica

(OTCQB:BKUT)

13

15.0500

5.3500

(64.5)

9.7000

10.7000

10.3

C.H. Robinson W'wide

(CHRW)

16

1.6700

1.0500

(37.1)

1.3200

1.4000

6.1

Cantel Medical Corp.

(CMN)

5

0.0991

0.0367

(63.0)

0.0624

0.0733

17.5

Caterpillar Inc.

(CAT)

20

2.4800

1.7200

(30.6)

1.9600

2.3400

19.4

Covidien plc

(COV)

7

1.0528

0.8105

(23.0)

0.8533

1.0410

22.0

Ecolab Inc.

(ECL)

21

1.0300

0.6900

(33.0)

0.8000

0.9200

15.0

Ensign Group Inc.

(ENSG)

5

0.3050

0.1950

(36.1)

0.2400

0.2600

8.3

Erie Indemnity Co.

(ERIE)

23

2.8025

1.7775

(36.6)

2.2100

2.3700

7.2

First of Long Island

(FLIC)

18

1.1900

0.7600

(36.1)

0.9400

1.0100

7.4

General Dynamics

(GD)

22

2.5100

1.6800

(33.1)

2.0000

2.1900

9.5

Hasbro Inc.

(HAS)

10

1.7400

1.2000

(31.0)

1.3800

1.5600

13.0

HEICO Corp.

(HEI)

6

0.1344

0.0560

(58.3)

0.0864

0.1120

29.6

Illinois Tool Works

(ITW)

39

1.8400

1.1800

(35.9)

1.4600

1.5600

6.8

Int'l Flavors & Fragrances

(IFF)

11

1.6100

1.0700

(33.5)

1.2700

1.4100

11.0

J&J Snack Foods Corp.

(JJSF)

10

0.6800

0.4800

(29.4)

0.5200

0.6400

23.1

JB Hunt Transport Svcs

(JBHT)

10

0.7100

0.4500

(36.6)

0.5600

0.6000

7.1

John Wiley & Sons Inc.

(JW.A)

20

1.1200

0.7400

(33.9)

0.8800

0.9800

11.4

Landstar System Inc.

8

0.7300

0.0000

(100.0)

0.2300

0.2500

8.7

Lazard Limited

(LAZ)

6

0.9600

0.7500

(21.9)

0.7600

0.9500

25.0

Lincoln Electric Holdings

(LECO)

19

0.8800

0.6000

(31.8)

0.6800

0.8000

17.6

Linear Technology Corp.

(LLTC)

21

1.2600

0.7800

(38.1)

1.0000

1.0400

4.0

Lyons Bancorp Inc.

(OTCQB:LYBC)

13

1.4767

0.9300

(37.0)

1.1667

1.2400

6.3

MDU Resources

(MDU)

23

0.8425

0.5175

(38.6)

0.6700

0.6900

3.0

Minden Bancorp Inc.

(OTCQB:MDNB)

11

0.3850

0.2550

(33.8)

0.3000

0.3400

13.3

Monro Muffler Brake Inc.

(MNRO)

9

0.4900

0.3300

(32.7)

0.3900

0.4300

10.3

MSC Industrial Direct Co.

(MSM)

11

1.3500

0.9300

(31.1)

1.0500

1.2300

17.1

Oil-Dri Corp. of America

(ODC)

11

1.0600

0.3800

(64.2)

0.7000

0.7400

5.7

Oracle Corp.

(ORCL)

5

0.4200

0.2400

(42.9)

0.2400

0.4200

75.0

PetSmart Inc.

(PETM)

5

0.7750

0.5250

(32.3)

0.6100

0.6900

13.1

Prosperity Bancshares

(PB)

15

1.0150

0.6450

(36.5)

0.8000

0.8600

7.5

PSB Holdings Inc.

(OTCQB:PSBQ)

20

1.0604

0.3900

(63.2)

0.6804

0.7700

13.2

R.G. Barry Corp.

(DFZ)

5

0.4100

0.2700

(34.1)

0.3200

0.3600

12.5

Rock-Tenn Company

(RKT)

5

1.0500

0.9500

(9.5)

0.8250

1.1750

42.4

Roper Industries Inc.

(ROP)

20

0.7150

0.4950

(30.8)

0.5500

0.6600

20.0

RPM International Inc.

(RPM)

40

1.0950

0.6900

(37.0)

0.8700

0.9150

5.2

Safeway Inc.

(SWY)

9

0.8150

0.5750

(29.4)

0.6400

0.7500

17.2

SEI Investments Co.

(SEIC)

22

0.4500

0.2000

(55.6)

0.3000

0.3500

16.7

Teche Holding Co.

(TSH)

12

1.8250

1.1250

(38.4)

1.4600

1.4900

2.1

Texas Pacific Land Trust

9

0.4800

0.0000

(100.0)

0.2300

0.2500

8.7

UMB Financial Corp.

(UMBF)

22

1.0350

0.6450

(37.7)

0.8200

0.8600

4.9

Valspar Corp.

(VAL)

36

1.0300

0.6900

(33.0)

0.8000

0.9200

15.0

Weyco Group Inc.

(WEYS)

32

0.8300

0.5300

(36.1)

0.6600

0.7000

6.1

No. Yrs. = Consecutive years of higher dividends (including 2013)

But Wait, There's More!

Not only did many companies accelerate regular quarterly payments from 2013 into 2012 in response to the Fiscal Cliff debate, but others (and some of the same companies) also declared Special, one-time dividends, to be paid in late 2012. Some were smaller than the quarterlies, while others were large per-share amounts that represented years of earnings growth. What they had in common was that the respective Boards of Directors deemed it to be in shareholders' best interest to pay these extra amounts while the 15% tax rate was still in effect. Below is a list of CCC companies that made such payments, but again, the roster of companies that paid Special Dividends may number in the hundreds of companies, and the effect will be the same as the Accelerated Dividends mentioned above: database listings will suggest a reduction in 2013 dividends that is, at best, artificial.

Company

Ticker

Pay

Pay

Name

Symbol

Amount

Date

American Financial Gp

(AFG)

0.25

12/24/12

Atrion Corp.

(ATRI)

10.00

12/10/12

BOK Financial Corp.

(BOKF)

1.00

11/30/12

Bowl America Class A

(BWL.A)

0.50

12/28/12

Brown-Forman Class B

(BF.B)

4.00

12/27/12

Campbell Soup Co.

(CPB)

0.29

12/28/12

Commerce Bancshares

(CBSH)

1.50

12/17/12

Costco Wholesale

(COST)

7.00

12/18/12

Daktronics Inc.

(DAKT)

0.50

12/20/12

Eaton Vance Corp.

(EV)

1.00

12/20/12

Epoch Holding Corp.

(EPHC)

0.75

12/14/12

Erie Indemnity Company

2.00

12/21/12

Fastenal Company

(FAST)

0.50

12/21/12

Franklin Resources

(BEN)

3.00

12/20/12

HEICO Corp.

2.14

12/31/12

Honat Bancorp Inc.

(OTCQB:HONT)

2.00

11/30/12

Lancaster Colony Corp.

(LANC)

5.00

12/28/12

Lazard Limited

0.20

12/27/12

McGraw-Hill Financial

(MHFI)

2.50

12/27/12

Mine Safety Appliances

(MSA)

0.28

12/28/12

NACCO Industries

(NC)

3.50

12/24/12

National Healthcare Corp.

(NHC)

1.00

12/21/12

National Interstate Corp.

(NATL)

2.00

12/10/12

National Research Corp.

(NRCI)

1.50

12/18/12

NewMarket Corp.

(NEU)

25.00

11/27/12

Republic Bancorp KY

(RBCAA)

1.10

12/21/12

RGC Resources Inc.

(RGCO)

1.00

12/17/12

RLI Corp.

(RLI)

5.00

12/20/12

SEI Investments Co.

0.32

12/28/12

Southside Bancshares

(SBSI)

0.33

12/6/12

Span-America Medical

(SPAN)

1.00

12/14/12

T. Rowe Price Group

(TROW)

1.00

12/28/12

Teche Holding Co.

0.37

12/31/12

Tootsie Roll Industries

(TR)

0.50

12/28/12

W.R. Berkley Corp.

(WRB)

1.00

12/31/12

Westlake Chemical Corp.

(WLK)

3.75

12/12/12

Conclusion

To many investors, a widespread distortion in the year-by-year dividend record may not seem like a big problem. But especially to Dividend Growth investors, it's going to be a significant (and lingering) impediment to assessing the consistency of the dividend history. That problem will first appear in 2014, but may continue to create confusion for years to come. A 2017 or 2018 investors will wonder if long streaks of dividend increases actually ended "back in 2013" and metrics like 5- and 10-year Dividend Growth Rates will be severely skewed by automated databases. Extra due diligence will be required to interpret what Congress hath wrought.

Source: Beware Phantom Dividend Cuts