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Yesterday, Costco surprised its shareholders with a treat: a $7.00 per share special cash dividend.Costco is just one of a series of companies announcing these unexpected payouts as the fiscal cliff looms.
You see, one big risk of the fiscal cliff is the expiration of Bush-era tax cuts, which among other things could send dividend income tax rates from 15 per cent to 43.5 per cent.
In anticipation of this, companies are dumping cash on their shareholders so they can take advantage of the current low tax rate.
In a new note, Deutsche Bank retailing analyst Mike Baker outlines 6 characteristics of companies that are likely to announce one of these surprise special dividends.
- A high cash balance
- A decent balance sheet
- A high insider ownership
- A current dividend policy in place
- A high per cent of sales occurring domestically
- A strong year to date stock performance
Baker couldn’t find a company in the retailing sector that fit all six characteristics perfectly. However, he does identify five stocks under his coverage that are most likely to announce something. From his report:
- BBBY has the cash, the balance sheet and the inside ownership. The stock performance hasn’t been great but that’s arguably the least important of our criteria. The biggest issue is that they don’t currently pay a dividend
- ORLY has the cash, the balance sheet, the inside ownership and the stock performance, but doesn’t currently pay a dividend
- ROST fits on all measures except cash as a per cent of market cap, but is close
- SPLS fits on all accounts except the inside ownership criteria
- WSM fits on all measures except cash as a per cent of market cap, but is close
There’s still no fiscal cliff deal yet, so there’s no guarantee that these particular taxes will go up. Perhaps these companies will wait until the last minute to unload that cash.
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