Accelerated Dividend Explained!
If you are wondering what an accelerated dividend is, simply put: an accelerated dividend is considered as a “special dividend” issued before a forecasted change in the dividend occurs.
An accelerated dividend is a dividend that adjusts ahead of time to changes in tax policies to minimize the shareholder’s tax bill and is paid in a lump sum amount depending on the company’s dividend structure or announcement.
Most companies pursue this strategy to expand their operations and foster growth prior to any adverse changes in the framework of their country’s dividend taxation.
It is also a way of financial or business reconstruction that will save a considerable amount of the company’s earnings with some companies generating a higher profit from having their dividends accelerated which in turn can be beneficial to both the company and its shareholders.
The accelerated dividend explained
Accelerated dividends are often used by most companies in the US and the UK to generate more income by paying out all the declared dividends before the changes in the country’s taxation policy is finalized.
In the United Kingdom, the introduction of accelerated dividends resulted in a new tiered dividend taxation system leading to an accelerated dividends payout in 2016 by many public and private companies.
The new tax system caused an increase in the marginal tax rate by around 6% thereby raising the usual tax paid by the shareholders thus making the accelerated dividends payout strategy the desirable strategy to employ before the increase in the marginal tax rate commenced.
In the United States, the payout of accelerated dividends was expedited before the expiration of the preferential 15% income tax on dividends instituted by former president George W. Bush in 2003.
In relation to the fiscal cliff which was a result of the imbalance in the federal budget caused by expiring tax cuts and government spending, companies feared that this change could burden the taxpayers who were the highest income shareholders.
This led to an increased dividend payout by four times the usual amount in the fourth quarter of 2012, in an effort to try to minimize the shareholder’s tax in relation to the expiring preferential dividend tax as this would connote a doubled rate on tax payment.
The consolidation of future dividends into one payout saved millions of dollars and helped companies worldwide to take advantage of the dividend acceleration when there is an imminent change in taxation policy.
However, it is not always the best option for the company size and financial standing should also be taken into consideration.
U.S. companies that paid accelerated dividends in December 2012
About 228 companies in November 2012 announced special dividends with a total declared value of $31 billion in the fourth quarter of the year.
The increase is more than three times the amount of the 72 companies that also accelerated their dividends a year earlier.
In the following year on January 2013, a last minute fiscal cliff deal was signed which set a 20% marginal tax rate on dividend income and the result of that on the adjusted gross income of a US taxpayer can be seen as follows:
Adjusted Gross Income
Single shareholder – >$200,000
Married and filing jointly – >$250,000
The fiscal cliff deal implemented a 20% top marginal tax rate on any dividend income for taxpayers who had an adjusted gross income of more than $200,000 when filing under a single status or more than $250,000 when filing under a joint or married status.
Other grounds for accelerated dividends
A special dividend is the result of a company paying out a large dividend.
In cases when a company does pay out a special dividend, this usually signals that the dividend may be linked to the sale of a company’s assets.
It is also possible for a special dividend payout to indicate that the company has earned a lot of income to the point that the earnings are considered a generous surplus already and so these earnings were funneled back to the shareholders invested in the company.
In the event that a company partakes in a restructuring process or the company would like to implement changes or innovations that would significantly save on the costs the company has to pay, a portion of those savings that were a result of a higher profit margin could be passed onto the company’s shareholders in the form of a special dividend payout or an accelerated dividend payout.
List of Companies that Accelerated their Dividends (2012 – 2013)
- Seaboard Corp. (SEB) – consolidated a single dividend payment on December 28, 2012 of its $3 annual dividend for the period covering 2013 to 2016.
- Oracle Corporation (ORDL) – issued a one-time payment of $0.18 for the first three quarters of 2013, accelerating its $0.06 dividend per share on December 21, 2012. The Chief Executive Officer of Oracle, Larry Ellison, saved over $50 million in the payment of federal income taxes from the accelerated dividend as the CEO received almost $200 million in dividend payout from the 1.1 billion Oracle shares he had owned at that time.
- Costco Wholesale Corp. (COST) – funded a $3 billion special dividend of $7 per share by incurring a debt of $3.5 billion.
- The distribution of an accelerated dividend is a strategy certain companies would use to signal that there is more money being made than what the company can use or knows what to do with to those who are interested in investing in the company.
- An accelerated dividend is what happens when a company pays prospective dividends in a lump sum amount rather than the typical scenario of paying dividends continuously throughout a certain time period.
- A company has the liberty to issue accelerated dividends in advance of any changes in tax policies to contribute to the effort of minimizing the tax bills shareholders have to pay on dividends.
- There have been instances when large dividends were paid out to shareholders prior to changes in taxation policies that occurred in both the United Kingdom and the United States of America.