Dividend angst leads to unconventional actions

Walmart moved its quarterly dividend payment up a few days so it would fall in 2012, but Costco took tax avoidance to a new level this week.

In anticipation that tax rates on dividends will rise next year as the federal government flounders for ways to raise revenue rather cut spending, a flurry of companies are paying one time dividends or adjusting payment dates. Walmart falls into the latter camp and said its 39.75 cent per share payment scheduled for January 2 would instead be paid on December 27.

While the move will help some investors avoid paying tax on the quarterly amount, it was nothing compared to the extreme step Costco announced. It plans to pay a $7 a share dividend before year end that will cost the company a total of $3 billion. The payout is extraordinarily generous considering Costco is exhausting its reserves to do so. Net cash provided by operating activities during the company’s fiscal year ended September 2, was only slightly more than $3 billion while the company’s balance sheet for the period reflects cash, cash equivalents and short term investments of roughly $4.8 billion. To fund the payout, Costco will take advantage of historically low interest rates and its favorable credit rating to issue $3.5 billion worth of notes at rates ranging from .65% to 1.7% and maturities ranging from 2015 to 2019.

The huge payout and the manner in which it will be funded are ironic. Recall Costco founder, current board member and recently departed CEO Jim Sinegal was a vocal supporter of President Barack Obama during the recent election and the administration’s view that wealthy folks could afford to pay more in taxes. Sinegal even appeared on national television from the Democratic National Convention to explain his support for Obama.

Now, Costco is helping shareholders, avoid paying the increased taxes Sinegal indicated were fair during the election by rushing to pay a special dividend before higher rates become effective and it is incurring debt to do so.

Costco CFO Richard Galanti characterized the payout simply as a measure to return cash to shareholders and made no mention of an imminent tax increase on dividend payments as a motivating factor.

"Our strong balance sheet and favorable access to the credit markets allow us to provide shareholders with this dividend, while also preserving financial and operational flexibility to grow our business globally; allowing for ongoing dividend and share repurchase activities; and enhancing the value of the Costco membership to the more than 67 million Costco cardholders throughout the world," Galanti said.

The dividend payment was announced several weeks after the company disclosed that Costco CEO Craig Jelinek spoke with President Obama by phone on November 17. Jelinek said the conversation was part of the administration's outreach to the business community to discuss current economic conditions and fiscal policy issues.

"I expressed strong support for the President's efforts to reach a compromise with Congress before the end of the year that avoids any tax increase on middle class taxpayers," Jelinek said. "Costco employs over 115,000 workers in the U.S., most of whom are middle class family wage earners. Likewise, the small businesses that make up the bulk of our business members employ thousands of working people who have borne the brunt of the recession. Now, with signs pointing to a modest economic recovery, it would be a particular burden on those working families to face higher income taxes."

Jelinek said he encouraged the President to continue working with Congressional leadership to find a balanced solution to the deficit that will avoid middle class tax increases and that it was imperative both sides of the aisle compromise