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The last time it occurred, U.S. companies repatriated 45% of their foreign profits. The last time it occurred was 2004.
A repatriation tax holiday is the “it” I refer to. For a brief, glorious moment in U.S. tax history, U.S. companies were permitted to repatriate foreign profits and pay a 5.25% income tax rate on what was repatriated. Had Congress not enacted the repatriation tax holiday, any profits repatriated would have been taxed at the 35% corporate income tax rate.
And repatriate they did. Eight-hundred-forty-three U.S. companies brought home $362 million of foreign profits, accounting for 45% of their foreign holdings, by the end of 2004. Of the returning profits, $312 billion was taxed at the reduced income tax rate, according to the Internal Revenue Service.
Much of the cash repatriated in 2004 found its way into shareholder broker accounts. National Bureau of Economic Research data show that for every dollar of repatriated cash, companies bumped up dividend payments $0.60 to 0.92 per share. Microsoft (NASDAQ: MSFT) paid the most famous dividend that year with its $3 per share — $32 billion in total — special dividend.
We could be in for an even bigger dividend bonanza in 2017.
Tax Holiday for a Trillion Dollars
Donald Trump favors a one-time 10% repatriation tax rate to entice U.S. companies to repatriate the $2.5 trillion in profits they hold offshore. Though these companies are unlikely to repatriate every dime, if they were to repatriate 45% of it, which occurred in 2004, more than a trillion dollars would flow back home. If it were a trillion dollars, the after-tax amount would be $900 billion.
Many business executives believe a repatriation tax holiday is within smelling distance. Nearly 58.3% of CFO respondents to a CNBC Global CFO Council survey think that a repatriation tax holiday will occur in 2017.
What are CFOs’ plans for the windfall once it reaches these shores? I can tell you what isn’t planned. Only 12.5% of the CNBC respondents said they plan to use the repatriated money to increase domestic headcount.
In other words, these companies will have a lot of money on hand and a dearth of new investment opportunities to allocate that money. This tells me that a sizable chunk of any repatriated money will be used to buy back shares or pay dividends. I would expect to see a spike in special dividends, in particular. In 2004, the number of companies paying special dividends tripled compared with special dividends paid in 2003. (It’s worth noting that the income tax rate applied to dividends was also lowered in 2003).
Find the Right Special Dividend Opportunities
Special dividends are especially sensitive to changes in the tax code. In anticipation of a possible repeal (which didn’t occur) of the lower income tax rate applied to qualified dividends, special dividends in the fourth quarter of 2012 surged to a record 233 payments, an 800% increase in the number of special dividend payouts compared with the previous year.
You might think that special dividends offer little more than a jolt of immediate cash flow. Not true. Special dividends can contain valuable information about future earnings, cash flow, and return potential. Our research (in addition to research by others) shows that special dividends imbued with specific characteristics lead to market-beating share-price appreciation.
The right special dividends, exhibiting the right characteristics, frequently generate exceptional investment returns.
I expect to see a plethora of special-dividend declarations in 2017. Some will be worthwhile for the extra income, but only a few will possess the specific characteristics that increase the odds of generating exceptional returns.
To learn more about special dividends and the exceptional return potential the right special dividends offer, click here. Better to learn how to exploit the bonanza now than before the bonanza is under way.