US fiscal cliff drives special dividends It was when politicians began cranking up the rhetoric over the summer - just as the US presidential election campaign was heating up - that Mike Clarke got out his calculator. Mr Clarke is chief executive of Access National, a Virginia-based bank with a market capitalisation of $140m. He and his fellow directors own almost 40 per cent of the company, with another 30 per cent or so in the hands of retail investors. Through the noise of the campaign, one message came through loud and clear: there was a high chance taxes were going up next year. Mr Clarke and the board began to calculate the benefits of paying shareholders a big lump sum this year, when it could be taxed at the current low rates, instead of waiting to pay it as dividends over time, when the federal government would be taking a bigger chunk. "We did the math," he says. We work for the shareholders. We do intend to grow our company, we do intend to buy other companies if we can get those in our sights to agree, but taxes are going up on upper-end taxpayers, and that is a lot of our shareholder base. It is no small matter. Last week, Access National said it would make a one-time payment of $7.2m to its shareholders before the end of the year, boasting that its investors would take home 50 per cent more after tax than if the company had waited until next year. The bank is just one of a record number of US companies, big and small, that have done the same maths and are signing off on special dividends. Propelling the rush is the risk that the current low tax rate of 15 per cent on dividends is an endangered relic from the tax-cutting fervour of the previous decade. While Washington may delay or limit the hit from the fiscal cliff's $600bn of automatic tax rise and spending cuts by the end of December, investors worry that higher taxes on dividend income are inevitable given the dire long-term budget outlook for the US, and the re-election of President Barack Obama, who made raising taxes on the rich a central plank of his campaign. The Bush tax cuts passed in 2003 lowered the top rate paid on dividends from 38.6 per cent. Now there is a risk that the top rate could hit 39.6 per cent, with an additional 3.8 per cent on top of that to help pay for the new healthcare law. Since October, 103 companies have said they will pay special dividends or make additional payouts, before the end of the year according to Markit. The data firm is forecasting that 123 companies will announce special dividends by the end of this year, well above the average of 31 that usually make such plans in the final quarter. Notably, the pace has picked up since the US election result and focused the attention of investors on the fiscal cliff negotiations. Since the US election, 66 companies have declared special dividends, compared with 37 announcements from the start of October to early November. This is the not the first time in recent years that special dividends have spiked in the fourth quarter. In 2010, there was a similar rush from companies, only for Washington to delay ending the Bush tax cuts. It is a phenomenon that worries James Paulsen, chief investment strategist at Wells Capital. "If I invest in a company for its growth prospects and it pays a special dividend, I have to question why I'm holding it in my portfolio," he says. Perhaps unsurprisingly, companies under family control or whose board members own large amounts of stock are among those most likely to pay special dividends. "Concentrated ownership at the executive and board level can more expeditiously push for one-time special dividends at the current favourable tax levels," says Virgil Calahong, dividend analyst at Markit. Among the companies recently making such a move are those with a hefty percentage of insider holdings. These include Franklin Resources, with insiders holding 35.42 per cent of the company, Werner Enterprises with insiders at 38.5 per cent, and Knight Transportation, with 27.3 per cent held by insiders. Wynn Resorts has issued a one-time dividend of $750m, with insiders owning 21 per cent of the company, led by Steve Wynn, its chief executive and founder, who holds about a tenth. Other tightly held companies announcing special dividends include Sinclair Broadcast Group, Marine Products Group and Sycamore Networks. One notable example of insider control at a major blue-chip company is Walmart, with the world's largest retailer moving its dividend payout to December 27 from a previously announced date of January 2. While that action is not a special dividend, the Walton family owns 48 per cent of the company. In the event that higher taxes on dividends become reality, larger companies that have attracted the attention of yield-starved investors in recent years are expected to weigh up the choice of sticking with regular cash payouts or accelerating equity buybacks. "If tax rates rise on dividends, large companies will look at doing more buybacks as a way to return cash to shareholders," says Marc Pado, a market strategist at Dowbull, which is an investment advisory firm.