.... somebody else apparently! What do you guys think about Costco borrowing $3 Billion to be able to pay a dividend in 2012 before the tax-rate increase arrives in January? On the one hand this is obviously a smart move personally but they are using the corporate balance sheet to line their pockets. Oh wait, Costco co-founder Sinegal et al are some of those guy trumpeting the NEED to pay more taxes. Ironic. http://online.wsj.com/article/SB10001424127887324705104578149012514177372.html?mod=googlenews_wsj When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The Costco COST +2.00% 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"? Specifically, the giant retailer announced Wednesday that the company will pay a special dividend of $7 a share this month. That's a $3 billion Christmas gift for shareholders that will let them be taxed at the current dividend rate of 15%, rather than next year's rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8% from the new ObamaCare surcharge. 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. Shareholders were happy as they bid up shares by more than 5% in two days. But the rating agencies were less thrilled, as Fitch downgraded Costco's credit to A+ from AA-. Standard & Poor's had been watching the company for a potential upgrade but pulled the watch on the borrowing news. 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. This isn't exactly the tone of, er, shared sacrifice that Mr. Sinegal struck on stage in Charlotte. He described Mr. Obama as "a President making an economy built to last," adding that "for companies like Costco to invest, grow, hire and flourish, the conditions have to be right. That requires something from all of us." But apparently $4 million less from Mr. Sinegal. By the way, the Costco board also includes at least two other prominent tub-thumpers for higher taxes— William Gates Sr. and Charles Munger. Mr. Gates, the father of Microsoft's MSFT -1.24% Bill Gates, has campaigned against repealing the death tax and led the fight to impose an income tax via referendum in Washington state in 2010. It lost. Mr. Munger is Warren Buffett's longtime Sancho Panza at Berkshire Hathaway BRKB +0.13% and has spoken approvingly of a value-added tax that would stick it to the middle class. Costco's chief financial officer, Richard Galanti, confirms that every member of the board is also a shareholder. Based on the most recent publicly available data, they own more than 4.1 million shares and more than 1.3 million options to purchase additional shares. At $7 a share, the dividend will distribute roughly $29 million to the board, including Mr. Sinegal's $14 million—at a collective tax saving of about $8 million. Even more cannoli. We emailed Mr. Sinegal for comment but didn't hear back. Mr. Galanti explained that while looming tax hikes are a factor in the December borrowing and payout, so are current low interest rates. Mr. Galanti adds that the company will still have a strong balance sheet and is increasing its capital expenditures and store openings this year. As it happens, one of those new stores opened Thursday in Washington, D.C., and no less a political star than Joe Biden stopped by to join Mr. Sinegal and pose for photos as he did some Christmas shopping. It's nice to have friends in high places. We don't know if Mr. Biden is a Costco shareholder, but if he wants to get in on the special dividend there's still time before his confiscatory tax policy hits. The dividend is payable on December 18 to holders of record on December 10.
And using reams of historical data, Warren Buffet would be correct. But I'm not sure I would even consider this disbursement scheme a "business decision," in terms of changing their product, their business model, or their employee roster. Meh.
I might suggest that the real purpose of being in business is not to be in business but to make money... these guys have done that! Do you think this was an ethical move on their part, given their RECENT public pronouncements?
Everyone is greedy. The fight is over who controls that greed and channels it in the best interest of the nation. Is it the individual, the free market, or government? If all three, what is the right mix? There is nothing wrong with these guys advocating something that would advance the national interest and then acting personally selfish. It's the American way.
Sure, and I have no problem with it. Business ethics are distinct from personal ethics. In any event, this is in no way an unethical business move.
See how it works, the people that want to take their money away are the unselfish ones. Wanting to keep what you've earned, that's selfish.
Of course it will, but there is very little correlation between tax rate increase/decrease and GDP growth.
A one-time tax related decision is rather irrelevant in this context. Not like they can do this again next year unless there is another tax rate increase.
Correct. It is not hypocritical at all to be in favor of higher tax rates and also take a one time cash out. Costco executives, including the CEO, do not have the massively excessive pay packages many other execs do while still giving their workers a living wage and benefits.
Perhaps, but the one I posted is taught in Business school. I never got my MBA.....maybe that's where they teach yours.
...these types of deals where companies borrow money to pay dividends have been going on for years and years now. It's called dividend recapitalization. http://www.investopedia.com/terms/d/dividendrecap.asp#axzz2Dsfe8fRA It's crap for the shareholders. If a company you own does this kind of thing then it's probably a good time to re-evaluate your position in the stock. Another funny one (not a div recap scheme) is with Sturm Ruger (RGR). They announced a special div of $4.50 on Nov 20. Stock is up about 20% since then from about 48 to 58. Since the stock has skyrocketed insiders have been dumping shares like crazy lol. Their stock is also 40% short...meaning 40% of all the outstanding shares are shorted aka people are betting on the stock to go down. That is an EXTREMELY high short interest percentage. I am of the opinion that the insiders knew that announcing a special div would cause the stock to skyrocket allowing them to dump shares. I'm currently short and own put options on this stock after it skyrocketed....we will see who wins...me or the gun crazy freaks who think Obama is ending the 2nd amendment and taking all their guns.
I think div recaps are bordering on unethical in the business world. I am curious if Costco insiders will start dumping shares if the stock rallies too much further. As it stands the stock has rallied about $7.50 for a div that's only $7. Maybe another couple dollars higher and insiders will start unloading like with RGR.
Btw in case yall were curious what the terms of the debt offering were.... $1.2b in 3 yr notes at .65% interest $1.1b in 5 yr notes at 1.125% interest $1.2b in 7 yr notes at 1.7% interest
