The other day Costco (COST) announced it would pay a special $7-per-share dividend to shareholders. The company plans to distribute $3 billion so shareholders can take advantage of the lower tax rates in 2012.
Although Costco's dividend is the largest that's been announced so far, the company is not alone here. Other special dividends have come from Las Vegas Sands (LVS), Dillard's (DDS), Brown-Forman (BF.B), Guess (GES) and Wynn Resorts (WYNN). In that vein, Wal-Mart (WMT) moved its previously planned dividend from January to late December.
While these announcements sound shareholder-friendly, let's be honest and call this what it is -- it's just a big fat payout to insiders. These execs will be able to sidestep a tiny increase in the marginal tax rate -- a rate that is expected to go back to levels not seen since the Clinton administration. Big deal.
Costco plans to pay for the giant giveaway by borrowing $3.07 billion. Co-founder Jim Sinegal will magically be the biggest winner, since he personally owns more than 2 million shares. Las Vegas Sands founder Sheldon Adelson will get more than half of that company's $2.2 billion special dividend. Similarly, the Marciano family will benefit from the Guess payout. The Walton family will be the big beneficiary of the Wal-Mart plan, and Steve Wynn will get the lion's share of the Wynn Resorts special dividend.
To me, these types of one-time payouts and shareholder buybacks indicate these management teams really have no idea how to grow their respective companies. I know interest rates are low, but why is Costco borrowing money just to pay it out to shareholders? Why can't that money be used to grow the company? It's not as if Costco is widely profitable -- it isn't. Member fees make up almost its entire bottom line. Without those fees, Costco would have a miserable operating margin of just 0.7%. Why doesn't it spend the money trying to figure out how to earn a profit?
Likewise, the other management teams are putting themselves ahead of shareholders by pretending there is some long-term benefit to the latter. But we all know what will happen. When the stock pops on the news, hedge funds will sell into the pop. In two months, the shares will be no higher than they had been before all of these announcements.
Hedge funds are already circling companies with lots of cash on the balance sheet -- names like Cisco (CSCO), Apple (AAPL) and Microsoft (MSFT). They are ready to pounce on the next press release. How does an induced one-time pop in the stock benefit shareholders and employees over the long term?
If management is going to treat shareholders like this, don't be a chump. Dump the shares into the pop and go buy stock in a company that has real growth.