Earlier this week Costco (COST) announced a $7 special dividend payable to shareholders in December. The idea behind it is to give shareholders an extra bonus prior to the potential dividend tax hike. Several other companies have announced special dividends but Costco's will cost just over $3 billion. Costco is a solidly run company that continues to grow. I've never been to a Costco because where I live Sam's Club dominates the bulk shopping arena.
There's a few issues that I have with the special dividend. One, who knows what is going to come from the "Fiscal Cliff" negotiations so they're paying this for something that might not have any change at all. Two, in order to pay for the special dividend they're having a $3.5 billion debt offering. So the company is essentially going further into debt just to pay a special dividend. I know that companies have access to very cheap money but still taking on debt just to pay shareholders confuses me. Three, while some shareholders are celebrating the special dividend most of the owners that are truly benefiting from it are not the individual investor. It's the inside owners and large institutions. The co-founder, Jim Sinegal, owns around 2 million shares. That's a $14 million payout in December on top of the regular dividends they've declared so far this year. If the dividend tax rate does increase due to the Fiscal Cliff, it's definitely increasing on his tax bracket and potentially might not on the smaller individual investor.
What do you think of Costco paying for the special dividend by having a debt offering to pay for it?