Tax Law Change Spurs Some Dividend Hikes

The recent federal tax cut on dividend income spurred more companies to raise their payouts to shareholders last month -- in some cases by 100% or more.

But income-hungry investors who are expecting a flood of bigger dividends may find that many firms will be slow to turn more generous with their cash, some analysts warn.

A total of 96 companies boosted their dividends in June, up 10.3% from the 87 increases in June 2002, according to Standard & Poor’s in New York.

The pace of increases picked up in June from the first five months, when 692 companies raised dividends, up 4.8% from a year earlier, S&P; data show.

Congress approved on May 23 a $350-billion tax cut bill, one provision of which was a cut in the maximum tax rate on dividend income from 38.6% to 15%.

“Given the change in tax treatment of dividends, companies that have the ability to increase appear to be doing so,” said Joseph Lisanti, editor of S&P;’s Outlook newsletter.

Among the big-name companies that raised their dividends sharply in June were brokerage Goldman Sachs Group, which more than doubled its quarterly cash payment, from 12 cents to 25 cents a share; Bank of America Corp., which raised its quarterly payout 25%, to 80 cents a share; and casino operator Mandalay Resort Group, which declared its first-ever dividend at a quarterly rate of 23 cents a share.

All three firms specifically cited the tax cut as a reason for the changes in their payouts.

“By paying a higher dividend we give shareholders more flexibility in deciding whether to use their share of our profits for spending or reinvestment,” Ken Lewis, chief executive of Bank of America, said when the bank raised its dividend June 25.

One goal of the tax cut, as championed by the Bush administration, was to underpin consumer spending and the struggling economy by putting more cash in investors’ pockets.

The lower tax rate will make any qualifying dividend more valuable to investors. But the change also was expected to bring pressure to raise payouts.

Yet roughly 95% of companies declaring quarterly dividends in June made no change in their payments, instead continuing the same rate as in the previous quarter, S&P; data show.

Boeing Co., for example, on Monday declared a quarterly dividend of 17 cents a share, the same as for the last two years.

At most firms, dividends are paid out of profit. And because the earnings outlook remains shaky at many companies because of the weak economy, managements aren’t rushing to commit to higher dividends, analysts say.

“There’s more at work here than the tax law,” Lisanti said. Companies in many economy-sensitive industries “can’t afford to increase dividends,” he said.

Corporate managers have long tended to be conservative in raising dividends because, once a payout is increased, it’s usually an investor-relations disaster if a firm later hits hard times and is forced to cut its dividend.

John Ludemann, a 74-year-old retiree in Palm Desert, is among many investors who rely on dividends to supplement other income. For that reason, he said he’s more interested in owning stocks that pay dependable dividends than in looking for companies that announce big increases that might not stick.

“I want a dividend that’s going to continue through thick and thin,” said Ludemann, who owns such shares as Exxon Mobil Corp. and Clorox Co.

The views of big investors also carry great weight when corporate managers consider whether to raise their dividends or use excess cash in other ways.

Jewelry retailer Zale Corp., which doesn’t pay a dividend, on Tuesday said it would spend as much as $300 million to buy back up to 20% of its stock.

The Irving, Texas-based firm said it has discussed the best use of its cash with major shareholders in recent months, and decided that a stock buyback would be “the best transaction in the short-term to create shareholder value,” said David Sternblitz, head of investor relations.

Wall Street applauded the move, sending the shares up $5.90, or 15%, to $45.90 on the New York Stock Exchange.

Robert Rodriguez, who manages the FPA Capital stock mutual fund in Los Angeles and is a major shareholder of Zale, said he was happy to see the buyback announcement. But for other companies, raising dividends may make more sense now than buybacks as a way to reward shareholders, he said.

“I think a lot of companies are in the process of thinking about” whether to boost dividends, Rodriguez said.

Lisanti said investors who are hunting for companies that may be poised to raise their payouts significantly might want to focus on firms that are heavily owned by insiders. With the drop in the tax rate, insiders can put more cash in their own pockets, as well as in other shareholders’ pockets, with heftier dividends.

A case in point, Lisanti said: Corus Bankshares Inc. of Chicago last month lifted its dividend 203%. More than 44% of the stock is owned by the family of its chairman, Joseph C. Glickman.

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More cash to shareholders

Here are some of the companies that have raised the dividend or initiated a dividend over the last month.

*--* Quar Quar Tues Annual div div Pctg stock div Co Prev New rise close yield Corus Bankshares $0.165 $0.50 +203% $48.69 4.1% Goldman Sachs $0.12 $0.25 +108% $85.85 1.2% Flagstar Bancorp $0.05 $0.10 +100% $25.06 1.6% Pier 1 Imports $0.06 $0.08 +33% $20.47 1.6% Bank of America $0.64 $0.80 +25% $80.00 4.0% BB&T; $0.29 $0.32 +10% $35.01 3.7% Mandalay Resort none $0.23 NA $32.50 2.8% Michaels Stores none $0.10 NA $38.78 1.0%

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NA = not applicable

Sources: Bloomberg News, Times research