Tax-Cut Plan Gives Boost to Dividends

The Bush administration’s proposal to end taxation of dividends may be far from becoming law, but it’s already influencing some companies’ decisions on payments to shareholders.

The number of companies raising dividend payments in January totaled 197, up 16% from a year earlier and the highest since February 2000, according to Standard & Poor’s, which tracks dividend trends.

Among the companies announcing dividend increases last month was Pogo Producing Co., a Houston-based oil and gas exploration firm. It raised its quarterly cash payment to 5 cents a share from 3 cents, a 67% increase and the first since 1994.

Pogo Chairman and Chief Executive Paul G. Van Wagenen said the Bush proposal “definitely” was a factor in the company’s decision, though he said the firm primarily was motivated by its optimism about future earnings growth.

“It certainly makes it more appealing if the tax consequences are reduced,” he said.

On Monday, retail giant Limited Brands Inc. said it would raise its quarterly dividend 33%, to 10 cents a share, in the first increase since 1999. The Columbus, Ohio-based company’s chairman and CEO, Leslie H. Wexner, said the firm was seeking to “efficiently return capital back to our shareholders.”

The White House early last month stunned Wall Street by proposing to end taxation of dividends paid to shareholders. The administration said the plan would stop the “double taxation” that results when companies owe tax on income and shareholders then owe tax on dividends paid out of that income.

The plan faces a long debate in Congress, and critics already have labeled the idea a handout to wealthy investors.

Many companies began to de-emphasize dividends in the 1990s, saying that taxation of those payments as ordinary income made them unappealing to shareholders. Instead, more firms used cash to buy back stock in an attempt to boost their share price because capital gains are taxed at lower rates.

But even before the Bush idea was floated, some investors had been talking up the idea of demanding that companies pay more of their annual profit directly to shareholders via dividends -- a reaction to the perceived misuse of cash during the 1990s boom years and to the corporate accounting scandals of 2002, analysts said.

After declining from 1997 to 2001, the number of companies raising dividends began to rebound last summer. Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York and a dividend expert, said the turn in the trend in part reflected a recovery in corporate earnings after the 2001 recession.

The January figure for dividend increases was “a big jump,” Kaufman said. What’s more, he said, 35 companies declared “extra” dividends last month, up 84% from the 19 that declared such payments in January 2002. Extra dividends typically are paid once a year by firms that have had healthy earnings and want to share more of their profit with stockholders.

“I wouldn’t be surprised if the Bush proposal is getting some companies to increase or initiate dividends,” Kaufman said.

Few firms are going out of their way to say so. Generally, statements accompanying dividend announcements in January didn’t refer to the Bush plan.

Las Vegas-based chemical firm American Pacific Corp., for example, didn’t mention the proposal last week when it said it would pledge a specific portion of its annual cash flow for dividend payments. The company until now hasn’t paid dividends.

Even so, although the tax-cut idea wasn’t the primary factor driving the company’s dividend plan, among the firm’s directors “there certainly was more discussion about the plan as a result of the Bush proposal,” said David N. Keys, American Pacific’s chief financial officer.

If nothing else, the administration’s proposal has helped to get more investors focused on the merits of earning cash dividends in a market where capital gains have been tough to come by, analysts say.

As a result, companies that raise or initiate dividends may gain a public relations advantage with investors in two ways: The firms appear more responsive to their existing investors’ needs, and they also stand out as potential new investors go hunting for companies that are boosting their cash payouts.

“This appeals to the mom-and-pop investors, and we want to attract them,” said Pogo’s Van Wagenen.