A record number of dividend payments in record amounts are not only possible, they’re probable. Political events to end last year have motivated companies to pay dividends like never before.
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Motivation centers on corporate income taxes. Motivation was delivered in a two-part act.
The first act centered on recurring corporate income tax rates. The top corporate income tax rate was slashed to 21% from 35% for 2018 and beyond. No Mensa IQ is required here: Fewer corporate dollars that flow to Uncle Sam increases the dollars that could flow as dividends to investors.
The second act centered on foreign earnings. Tax reform mandates cash and other liquid assets derived from foreign earnings and held in foreign accounts to be taxed at a 15.5% one-time rate.
Do you own foreign assets previously untaxed by Uncle Sam? You’ll pay the tax regardless if the assets are repatriated. So why not repatriate?
We have precedents on repatriation.
U.S. companies with large foreign cash accounts derived from foreign earnings were offered a one-time tax-repatriation holiday in 2004. The response?
Approximately $362 billion — 45% — of the $800 billion in earnings held in foreign accounts was repatriated.
What’s more, a sizeable chunk of the repatriated earnings found its way into shareholders’ pockets. For every $1 repatriated, $0.60 to $0.92 was paid as dividends, according to CNN’s reporting.
We face a much larger dollar figure this go-around.
Depending who you ask, U.S. companies hold between $2.6 billion and $3.1 billion in liquid assets held in foreign accounts. No choice is on offer this go-around. The money will be taxed, whether it stays there or comes here.
History suggest that dividends in total should be huge. Dividends individually paid should be impressive. Let’s consider the big three.
Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Cisco Systems (NASDAQ: CSCO) hold $448 billion in cash earnings held in foreign accounts. No three companies hold more.
If past is prelude, the potential for massive dividend payments from each tech behemoth becomes obvious.
Apple holds $252.3 billion in liquid foreign earnings. My back-of-the-envelope calculation shows Apple could pay a special dividend of up to $16 per share this year. (The calculation is based on the 15.5% tax, a 45% repatriation rate, and a 90% payout ratio.) The dividend would be six times Apple’s regular annual dividend.
Similarly, large dividends could be forthcoming from Microsoft and Cisco Systems.
Microsoft holds $127.9 billion in foreign cash and cash equivalents. Apply the same assumptions to the Microsoft foreign cash hoard and Microsoft could pay a special dividend up to $6 per share. The dividend would be 3.5 times Microsoft’s regular annual dividend.
Cisco Systems posts as the third-largest hoarder. Its foreign cash account stands at $67.5 billion. Cisco could pay a special dividend of up to $5 per share. The dividend would exceed the regular annual dividend by a factor of four.
The dividend-payout potential extends beyond the known behemoths. Thousands of U.S. companies hold similarly large foreign cash accounts relative to their respective balance sheets.
A tsunami of high-yield special dividends should be on offer this year. But not all should be taken.
The right large dividends offer immediate high-yield income. They set the stage for future share-price appreciation.
But the “right” large dividends are the exception, not the rule. Most large dividends provide immediate high-yield income. Too often, the share price fades like a spent tsunami.
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