November 30, 2012

Costco Dividend

I was very proud to not be a Costco member, when CEO Jim Sinegal took the stage at the Democratic Convention to do his part to elect the guy who was going to raise his taxes. It's a free country, and I certainly do not boycott Costco. It just doesn't appeal to the two of us in our humble condo. But I was glad to be off the list that night.

The WSJ Ed Page has a bit of sport as his expense today.

When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The Costco co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?

Costco is one of more than 130 companies who are -- smartly -- increasing dividends or rolling them into 2012 to avoid President Obama's new rates. But I don't recall many of the other 129 being on stage primetime at the DNC. And, something else makes this special dividend all the more special:
More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they're taking on debt to do so.

I guess they're Democrats after all!
We think companies can do what they want with their cash, but it's certainly rare to see a public corporation weaken its balance sheet not for investment in the future but to make a one-time equity payout. It's a good illustration of the way that Federal Reserve Chairman Ben Bernanke's near-zero interest rates are combining with federal tax policy to distort business decisions.

One of the biggest dividend winners will be none other than Mr. Sinegal, who owns about two million shares, while his wife owns another 84,669. At $7 a share, the former CEO will take home roughly $14 million. At a 15% tax rate he'll get to keep nearly $12 million of that windfall, while at next year's rate of 43.4% he'd take home only about $8 million. That's a lot of extra cannoli.

But, next year will be so much more fair!

UPDATE: Larry Kudlow updates my number to 170 -- and throws in Major League Baseball's, notorious for deferring revenue, finishing free agent contracts with front loaded 2012 bonuses.

Obama Administration Posted by John Kranz at November 30, 2012 10:55 AM

Yet still won't avert the painful cuts Romney was talking about. But what's national economic collapse in the face of "fairness?"

Posted by: johngalt at November 30, 2012 3:54 PM

Also notice what this does to the status notion that tax receipts versus tax rates can be statically calculated - blows it right off the page of the New York Times! (Well, an objective newspaper at any rate.) The idea that tax rate increases won't result in avoidance behavior, even by tax fairness "patriots" like Costco's CEO, must henceforth be null and void.

Posted by: johngalt at November 30, 2012 5:57 PM | What do you think? [2]