Special Dividends: Special Mostly For CEOs

by: Mike Nadel

Maybe you're in the market for a dividend-paying company and you have added two names to your watch list: financial-services firm T. Rowe Price (NASDAQ:TROW) and retailer Shoe Carnival (NASDAQ:SCVL). As you're finalizing your research, you notice that each will be paying a $1 special dividend on December 28, to shareholders of record by December. 17.

Should you take the plunge on both? After all, if you buy 300 shares of each, the special divvy alone will land you that iPad you've been wanting. Sweet!

You know who will have it even sweeter? T. Rowe Price chairman Brian C. Rogers and Shoe Carnival chairman J. Wayne Weaver. By deciding, along with their corporate boards, to "reward shareholders," they have rewarded themselves quite handsomely: $2.23 million for Rogers; $1.67 million for Weaver.

After all, what good is an iPad if you can't use it while cruising around on your new yacht?

Every day, several companies announce special dividends to be paid by the end of the year -- the better to cash in before a probable increase in the dividend tax rate come 2013.

Even if President Obama and his fellow Democrats can agree with congressional Republicans on new taxing and spending guidelines -- thereby avoiding the fiscal cliff that the whole world is talking about these days -- most observers believe dividends will go back to being taxed at the same rates as ordinary income. That's the way it was for decades until the 2003 Bush tax cuts dropped divvy rates down to 15 percent.

Naturally, corporate boards feel compelled to do something special for shareholders. What a happy coincidence that board members and other insiders will be among the most special beneficiaries.

For example, Costco (NASDAQ:COST) has announced a $7 per share one-time payout. That's especially good news for company director Jim Sinegal, who owns 947,860 shares and will enjoy a $6,635,020 windfall.

Nick Caporella, CEO of National Beverage (NASDAQ:FIZZ), laughs at that. As the guy who controls 74 percent of his company's outstanding shares, his $2.55 special dividend will bring him $87 million before taxes. Merry Christmas, indeed.

While some companies don't even mention the fiscal cliff or its potential consequences when announcing special dividends, Caporella issued a press release with this frantic headline: National Beverage Corp. Acts: 'Foregone Tax Rates Stimulate Shareholder Payback!'

At 15 percent, Caporella will fork over roughly $13 million in taxes on the FIZZ one-time payout. If, as expected, the top rate for dividends balloons to 43.4 percent (including the new 3.8 percent Obamacare surcharge for Medicare), his tax bill would have been almost triple -- $38 million -- for the same special dividend in 2013.

Of course, there never was any intention to pay a special dividend in 2013, which kind of renders that comparison moot.

If there's so much extra cash available to TROW, SCVL, COST, FIZZ and the numerous other companies paying special divvies, why aren't they using that dough to innovate or to buy back shares or to make acquisitions or to pay off debt or to strengthen regular dividends? Those are legitimate questions being asked by many economists, financial journalists, shareholders and other interested parties.

There is no Dividend Fairy waving a magic wand; money to pay special dividends must come from somewhere. Heck, Costco is even borrowing $3.5 billion to finance its big splash. It isn't alone; Brown-Forman (NYSE:BF.A) is issuing $750 million in bonds to fund its $4 per share payout.

Future dividends might be adversely affected, as might corporate fundamentals. After their huge paydays, board members could choose to sell big chunks of company stock to take advantage of the 15 percent capital-gains rate before that increases, too. Doing so would depress prices for the masses.

So far, none of the 25 companies I own have announced a special dividend ... and I'm not exactly broken up about it.

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.