San Jose Mercury News: Oracle, Cisco among companies rushing to pay dividends before fiscal cliff

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(Original Post)

By Steve Johnson and Brandon Bailey
Staff writers

Posted:   12/04/2012 04:41:26 PM PST
Updated:   12/05/2012 08:41:35 AM PST

As the nation gets close to plunging over the metaphorical fiscal cliff, triggering what could be massive tax increases and spending cuts in January, scores of businesses -- including at least two major Bay Area corporations -- are taking steps to soften the landing for their shareholders.

Oracle (ORCL) of Redwood City and San Jose-based Cisco Systems (CSCO) are among more than 100 companies nationwide that are paying dividends in advance this year so their investors won't get taxed more heavily for the money next year. And experts believe the number of firms jumping on the early dividend bandwagon is bound to increase.

"We're going to see an avalanche," said Howard Silverblatt, a senior index analyst with Standard & Poor's. "It's a no-brainer. If I'm a shareholder and you don't do that, you're going to hear from me."

But the rush to pay dividends before the end of the year drew fire from one liberal-leaning tax reform group.

"This is just the masters of the universe taking care of each other," complained Rebecca Wilkins, senior counsel at Citizens for Tax Justice, a Washington, D.C., research group that has been critical corporate tax practices under current law. "It's pure self-interest."

While paying dividends early poses little financial problem for corporations, she added, it will be "detrimental to the U.S. Treasury."

The fiscal cliff refers to the year-end expiration of 2003 legislation that cut taxes, reducing the rate for dividends from 38.6 percent to 15 percent. Unless Congress and President Barack Obama work out a compromise, the rate will rise again. And that change -- coupled with a surcharge also set to go into effect in January to help pay for Obama's health care law -- would boost the dividend tax rate for the county's highest earners to 43.4 percent, experts say.

As a result, Standard & Poor's has seen a big jump in companies issuing dividends before the law runs out. Some have moved up the payment date of dividends that were scheduled for 2013. Others are awarding extra dividends, money not routinely issued to stockholders.

In November, 228 companies awarded "extra" dividends, compared with only 72 in November of last year. Silverblatt suspects many if not most businesses paying such dividends now were specifically avoiding the looming tax increase.

The trend doesn't surprise officials at financial data firm Markit. In its recent survey of 100 public companies, 38 percent said they were likely to issue unscheduled dividends before the end of the year, in many cases because of the fiscal cliff. Many corporate investors fear the dividend tax will increase "even if a grand bargain is struck in Washington," according to Markit vice president Chaitanya Gohil.

Nationwide, companies that have moved their dividend payments from 2013 to 2012 -- or have announced an extra dividend before the end of the year -- include Wal-Mart, Campbell Soup, Dillard's and Ethan Allen Interiors.

In the Bay Area, Oracle on Monday said it will pay three dividend payments of 18 cents per share in December -- for its second, third and fourth
The Cisco logo is displayed at the technology company's campus in San Jose, California February 3, 2010. ( Robert Galbraith / Reuters)
fiscal quarters -- which otherwise would have been paid next year. Oracle officials declined to discuss the decision. But they noted in a prepared statement that their biggest shareholder, CEO and board member Larry Ellison, didn't vote on the matter. He reportedly will get nearly $200 million from the accelerated payments.

Cisco's board decided in November to pay a dividend of 14 cents per share on Dec. 19 that ordinarily would have been paid in January. Although the board didn't reference the fiscal cliff in its announcement about the dividend, "the date changed because of the possible pending tax changes," said Cisco spokeswoman Kristin Carvell.

It's unclear how many other local companies are doing or considering the same thing.

Most Silicon Valley companies don't pay dividends because they are young and growing and prefer to invest the money in building or buying new technology, said Robert Hendershott, a finance professor at Santa Clara University, adding "there's a stigma" that paying dividends implies a company is no longer growing. But he noted that some leading tech firms have so much cash they can easily return some of it to shareholders.

Among local companies that do pay dividends, several -- including Intel (INTC), Hewlett-Packard (HPQ), Agilent, Applied Materials and The Gap -- said they haven't announced dividend changes. Others -- including Apple (AAPL), Chevron and Wells Fargo -- declined comment.

But Carl Guardino, CEO of the Silicon Valley Leadership Group, said he "would not be surprised" if more local firms chose to pay dividends this year instead of next, given worries about the fiscal cliff.

"Uncertainty makes people and businesses nervous," he said. "Therefore, some might act now... rather than wait upon the uncertainty of 2013."