(By Mani) For most taxpayers, the fiscal cliff means that the tax rate on dividends will increase from 15 percent to as much as 39.6 percent plus the 3.8 percent Obamacare surtax.
While the ultimate rate is unknown, expectations are for a substantial rise. The higher tax rates could lead to a rise in special dividends before the year-end.
"As such, we expect a number of companies to pay one-time special dividends towards year-end," UBS strategist Jonathan Golub wrote in a note to clients.
Theoretically, the benefit of a special dividend should equal the present value of tax savings. As such, bringing forward future dividends into the current period should provide a one-time benefit. However, "special dividend payers" could curry additional favor from investors, viewing these actions as "shareholder friendly."
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"In our view, the companies most likely to issue special dividends will exhibit a combination of (1) high insider ownership; (2) elevated cash balances; (3) ample free cash flow; and/or (4) low financial leverage," Golub noted.
Following are the 20 companies that are likely to pay a special dividend:
American Eagle Outfitters, Inc. (NYSE: AEO): The retailer is a candidate for paying a special dividend by year-end, as it has a high insider ownership. Recently, it incorporated special dividends into their capital repatriation strategies.
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Babcock & Wilcox Co. (NYSE: BWC): Babcock & Wilcox has indicated that they are analyzing a potential return of capital.
"Although they seemed to push out a decision time frame to Feb/March, from Nov/Dec., we think there is still some chance that they could announce a special dividend before year end," UBS analyst Steven Fisher said.
Cablevision Systems Corp. (NYSE: CVC): Cablevision could do a special dividend to enable the Dolan family to pull cash out.
CME Group (NASDAQ: CME): CME has a 5th dividend as part of its capital return policy usually in the first quarter, which is likely to be pulled forward if tax changes loom.
CBOE Holdings, Inc. (NASDAQ: CBOE): Given CME's success with special dividends and high free cash flow generation, CBOE could also decide to issue a special dividend if tax changes are likely.
Dish Network Corp. (NASDAQ: DISH): Dish, which is controlled and majority owned by Charlie Ergen, is likely to do a special dividend. They've done special dividends in the past to take cash out and, while they need the cash to pursue wireless strategy.
"We think it's better than 50:50 chance, they do a dividend before year end," analyst John Hodulik said.
Fastenal Co. (NASDAQ: FAST): Given its historic posture, there is a high probability of a 1x dividend at the company.
Franklin Resources, Inc. (NYSE: BEN): The company has large insider ownership, a significant cash balance, and a history of paying special dividends ahead of potential taxation changes, as demonstrated last year.
Gap, Inc. (NYSE: GPS): "We view GPS as a candidate for paying a special dividend by year-end, as it has a high insider ownership," analyst Roxanne Meyer added.
HCA Holdings, Inc. (NYSE: HCA): HCA paid out a special dividend of $2/share earlier this year. While the company's top priority for capital, beyond investing in its existing business, is non-profit hospital acquisitions, it has also indicated that it might consider paying out additional special dividends.
"Bain Capital, KKR and the founding Frist family still own about 58% of the company on a combined basis and have been supportive of dividend payouts in the past. If something is to happen this year, we expect it to come after the election," analyst AJ Rice added.
Lear Corp. (LEA): Lear is a potential candidate for issuing a special dividend. The company ended the second quarter with cash balance of $1.3 billion, which was $500 million more than the minimum cash requirement to run the business. A special dividend from Lear is a possibility, given an under-leveraged balance sheet and the company's inclination to return cash to shareholders.
Limited Brands, Inc. (NYSE: LTD): "We view LTD as a candidate for paying a special dividend by year-end, as it has a high insider ownership. LTD (over the past few years) has incorporated special dividends into their capital repatriation strategies," analyst Roxanne Meyer said.
Monster Beverage Corp. (NASDAQ: MNST): Analyst Kaumil Gajrawala views that Monster is flush with cash. With about 18 percent ownership of the company, the company's management would be well-served to distribute a special dividend before an increase in taxes.
Paccar, Inc. (NASDAQ: PCAR): The company typically does a special dividend at the end of the year and may do a larger one this year.
TransDigm Group, Inc. (NYSE: TDG): The company has indicated that they are considering a special dividend between $8 - $16 a share.
Tronox Ltd. (NYSE: TROX): The company said it would ask the Board to approve a special dividend this year, with a likely timing of mid-to-late fourth quarter. The company recently did a bond deal that was increased to $900 million from $650 million giving them extra room for a special dividend.
"We look for potentially a $2.50/sh dividend ($300M outlay of cash) in 4Q, with the timing before the end of the year driven by tax considerations. Perhaps a 50/50 chance," analyst Gregg Goodnight noted.
Wynn Resorts Ltd. (NASDAQ: WYNN): Wynn is likely able to finance an annual, special dividend of $4-5/share from Wynn Macau dividend alone, even with Cotai project spend.
"We believe that a special dividend is likely in the next 90 days for Wynn Resorts. Currently, with $700M of cash recently released from Wynn LV to the parent level, Wynn could perhaps do more than $7/share in a special dividend," analyst Robin Farley said.
W R Berkley Corp. (NYSE: WRB): It has the capital flexibility to pay a special dividend, and the CEO owns 17.5 percent of the shares outstanding.
Werner Enterprises, Inc. (NASDAQ: WERN):Werner is likely to announce a special dividend, as they've been doing this annually for the last few years.
Willis Group Holdings (NYSE: WSH): Willis Group has some capital flexibility and the CEO, who owns 1.9 percent of the shares outstanding, is retiring in July of 2013.