Special Dividend Payouts: Trump's Tax Reform and Dividends

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This afternoon, I sat down with my income investing expert – Steve Mauzy – to chat about these huge payouts . . . President Trump’s tax reform . . . and the outlook for these big dividends.
Here’s a transcript of our conversation. Read this, and get ready to collect your 12.8% dividend, every few weeks.
IAN: What is a special dividend? How is it different than a regular dividend?
STEVE: A special dividend is similar to a regular dividend. The declaration, ex-dividend, record, and payment dates for the special dividend are similar to the regular dividend.
Special dividends are different from regular dividends in that they generally are unanticipated payments. These are not scheduled like a regular dividend. A special dividend is a one-off event. A special dividend also usually offers a higher yield — frequently much higher — than a yield offered by a regular quarterly dividend.
IAN: What are the top reasons companies pay special dividends?
STEVE: Companies pay special dividends to remove excess cash from the balance sheet and to keep returns on invested capital high. These are two of the top reasons. Excess cash is a drag on returns on invested capital. Removing excess cash ensures that a company focuses on its highest-return investments. Removing the excess cash also prevents empire-building and, thus, instills capital-management discipline.
Companies also pay special dividends to reward shareholders. At the same time, a special dividend payout enables management to remain flexible by not committing to a regular large dividend that could be unsustainable.
IAN: There’s lots of news out of Washington about President Donald Trump’s tax reform. What could tax reform mean for dividends . . . and these big one-time special dividend payouts?
STEVE: Corporate tax reform would be a big deal. Lower corporate income tax rates would provide a lift to dividend payments. The math is simple enough: Less money paid to Uncle Sam as income taxes means more money that can be paid to shareholders as dividends. I would expect to see more companies pay both regular and special dividends if corporate income tax rates are lowered.
If we get a repatriation tax holiday, we should see a boom in special dividends. The last time a repatriation tax holiday was on offer, in 2004, large special-dividend payments soared. The opportunity to profit from these special dividends also increased.
IAN: Treasury Secretary Steven Mnuchin says that stocks will tank if the GOP tax bill isn’t passed. What are you expecting in terms of tax reform?
STEVE: Trump and company tried to push their tax-reform plans through Congress earlier this year. They were stymied in their efforts. I think this time is different. There appears to be more bi-partisan support, particularly on corporate income taxes.
IAN: Would lower corporate taxes encourage companies to issue more special dividends? Or bigger payments?
STEVE: I think both. Regular quarterly dividend payments should get a lift, but many companies will hesitate to increase them too much. They don’t want to elevate the regular dividend to a level that could prove unsustainable.
That said, cash flow could rise to levels where the cash can’t be invested profitably. Companies will need to reduce their cash account. Issuing special dividends would be a smart strategy for managing the cash account. I expect more companies to rely on special dividend payouts as a cash-management tool should we get lower corporate income tax rates.
IAN: When do you typically see the most of these special dividend payouts?
STEVE: The fourth and first quarters of the calendar year typically constitute the busy season for special dividend payouts. We’ve just entered the fourth quarter. I expect to see a pickup in special dividends now through the end of the year. I expect momentum to be maintained through the first three months of 2018. If we get tax reform, all the better. Tax reform will certainly amp up the momentum. Tax reform would lead to a special-dividend bonanza.
IAN: Thanks, Steve!
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