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Costco to Pay $7 Shareholder Dividend in Advance of Tax Change: Rude or Shrewd?

Costco Founder Jim Sinegal had some choice words in response to a Wall Street Journal article lambasting the company for paying a large dividend in advance of significant tax increases.

The Wall Street Journal took on Costco's decision to borrow $3.5 billion in order to pay a hefty $3 billion in dividends to shareholders this month, saving wealthier shareholders a hefty tax hike of over 39 percent on the dividends as Bush-era tax cuts are set to expire.

The Issaquah-based Costco normally pays an annual dividend of about $1.12, but the company announced last week that this month it will pay shareholders a special dividend of $7 a share.

Sinegal bristled at the Journal's view that he himself--a vocal supporter of President Obama who hosted a campaign stop at his Hunt's Point home earlier--will be one of the biggest benefactors of the move. With a December payout, Sinegal will net around $14 million in dividends, but if he received that money after the tax cut expires, he would net around $8 million, the WSJ reported.

The Puget Sound Business Journal reported that Sinegal commented on the WSJ piece, saying that it was the right thing for the cash-rich company to do for its shareholders.

"It would be disingenuous to suggest we did not recognize a good opportunity – that the tax rate is going to go up,” Sinegal told PSBJ, adding, “Isn’t it prudent to do the right thing for the shareholders?”

Sinegal went on to say that compared to founders of other large companies, he owns only a small amount of stock--one-half of one percent of the company's stock--and most shareholders are not in that upper income echelon.

He said borrowing the money to pay a higher dividend made sense because interest rates are hovering around 1 percent, and it will leave the company with cash for further expansion.

Tell us what you think; should Costco pay the special dividend, or is it hypocritical to do so?

Blue Ridge December 04, 2012 at 08:03 AM
It is not hypocritical to pay the special dividend, it is an intelligent move for the benefit of ALL Costco shareholders. Other companies sitting on a pile of cash (MSFT, Apple & more) should have followed suit. Many shareholders will be bailing out of the market before the end of the year and buying real gold and silver coins and bullion.
Terry J. LaBrue December 04, 2012 at 05:49 PM
This topic caught my eye in the WSJ to the extent that I cut out the article to share with my family. It's one thing for Costco to distribute company cash profits, but this time they borrowed the money on the open market to make the dividend. Sounds a bit fishy to me but perhaps the board of directors, including departed Sinegal, wanted to preserve and increase their personal cash pile. A senior VP at Costco once told a business group meeting I attended that Costco didn't care about its stock price. This tends to align with that point of view. I agree the market and the public are going to get smacked when the Democrats allow the current income tax breaks to expire, the Obamacare taxes kick in on top of the resumption of the normal Social Security payroll taxes. One, two, three -- we're screwed.
Michael Sandsmark December 05, 2012 at 06:33 AM
My personal happiness quotient would be lower without Costco Mixed Nuts.... and I believe that Costco's management team should be richly rewarded for the hard work that they do. That said, I don't consider Jim Senegal to be a man of integrity at all because he stood up at the Democratic National Convention and told us all what WE should do....but then he went and did exactly opposite. Jim Senegal is nothing more than a rich hypocrite unless he gives the $6M difference to charity or to the government.

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