Alump-sum cash payment made by companies to shareholders. This payment is typically made ahead of policy changes to protect shareholders from any negative impact these changes may have.
Accelerated Dividend Details
Accelerated Dividends are sometimes referred to as Special Dividends. While they are meant to insulate shareholders from adverse policy changes in an organization, a company may offer Accelerated Dividend for other reasons. A great example would be a company having a lot of money available on its balance sheets due to restructuring or selling an asset. Instead of reinvesting the money, companies can choose to funnel back this money to shareholders in the form of Accelerated Dividends.
Anticipated changes in tax policies can also drive companies to issue accelerated dividends. When countries announce tax reforms, companies issue accelerated dividends to minimize their shareholders' potential tax bills. Depending on its financial health and future economic assessment, the company may take on debts and consolidate future dividends into one payout distributed as an accelerated dividend.
Companies may also follow the Accelerated Dividends approach to drive growth and signal profit-making opportunities to potential investors. These also demonstrate the company's ability to generate long-term value and as a show of good faith to boost its shareholders' confidence. An accelerated dividend can also change a company's capital structure by reducing equity and assets.
Real-World Example of Accelerated Dividends
The UK Treasury announced new tax rates on dividends on April 6, 2016. As per the new policy, the first £5,000 of dividend earnings would be tax-free. Any amount above that attracts a 7.5% tax rate for the basic taxpayer and a 32.5% rate for the high-rated taxpayers. This raised the tax margin by about 6% for most shareholders. In this case, companies paying out Accelerated Dividends before April 6 would caution shareholders from these reforms and save them a lot of money.
A similar case to the one mentioned above is one whereby in November 2012, 228 companies in the US announced Accelerated Dividends. The total payout exceeded $31 billion, which was more than four times the payment made in dividends the previous year. Companies made these Accelerated Dividend payments ahead of the 15% tax payment termination on dividend income. At this time, companies' main concern was that the fiscal policy (a combination of tax cuts and reduced federal budget spending) could more than double the dividend tax rate for the high-income taxpayer category.
In the same year, Oracle Corp. (ORCL) issued an Accelerated Dividend payment of $0.18 per share. This happened after consolidating its quarterly Dividend of $0.06 per share for the first three quarters of 2013 into one payment. This move alone saved its CEO Larry Ellison who had more than 1.1 billion shares at the time, $50 million in taxes.
Accelerated Dividends vs. Normal Dividends
Accelerated dividends differ from Normal Dividends in various ways. Companies typically pay Normal Dividends quarterly and in uniform installments. While the companies can raise normal dividends, Accelerated Dividends are usually higher than the company's Normal Dividend payments. Companies are always keen to announce Accelerated Dividend payments to avoid raising expectations of higher payments in both investors and shareholders.
When looking at taxation, tax treatment for Accelerated Dividends is more complicated than that of Normal Dividends. In most cases, Normal Dividends are taxed as qualified dividends and have long-term capital gains. In contrast, Accelerated Dividends can have a mixture of ordinary income, returns of capital, and capital gains. Unlike normal dividends, accelerated dividends do not impact a company's stock valuations, which is the theoretical method of calculating its value or normal dividend yields because they are one-time events.