Wednesday, December 05, 2012

Dividend Cliff: Dividend Payments by US Companies Triple

People respond to incentives. Social policies influence people incentives to act.

Prospects of higher taxes on dividends has prompted many companies in the US to issue dividends three times last year’s amount.

More than 110 companies have announced special dividends totaling more than $22 billion this quarter – more than three times last year's fourth-quarter total,according to Markit Equities Research. The payouts are aimed at beating a potential increase in tax rates for dividends.

Dividend payments are currently taxed at 15 percent, but the rate could go to 43.4 percent for some top earners if the Bush-era tax cuts expire.

The total taxes paid on that $22 billion of dividends will be around $3.3 billion – $9.5 billion less than next year's potential taxes.

All shareholders benefit from the dividends, of course. But some of the biggest beneficiaries are corporate insiders and large shareholders. The companies paying accelerated dividends have an average insider ownership of 27 percent — higher than the broadermarket, according to Markit.
The question is if these dividends have been frontloaded? If yes, then dividends payments will fall and the tax revenues from tax increases on dividends will also decline which extrapolates to the Laffer curve in motion.

And if many public listed companies opts to withhold or reduce dividend payments in the coming year/s, then theoretically, this won’t bode well for the stock market

That’s because since 1930 dividends have accounted for 40% of total returns (chart from Absolute Return Letter)

This just goes to show how insidious "class warfare" business hostile policies can lead to unforeseen adverse outcomes.

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