It's clear which way companies have chosen to return money to their shareholders in recent weeks. What started off as dozens of companies declaring special one-time distributions is now hundreds of companies that are either declaring chunky dividends or moving up some of next year's payouts.
The appeal to dividends now is obvious: Payouts will cost shareholders more next year. The top rate on qualified distributions is currently 15%. If there aren't any last-minute reprieves, taxes on dividends could be as high as 43.4% for top earners.
In a sea of special dividends, it was interesting to see Berkshire Hathaway (BRK.A -0.97%) (BRK.B -0.92%) buck the trend with a peculiar buyback announcement yesterday. Berkshire Hathaway will be buying 9,200 Class A shares from a longtime shareholder's estate in a $1.2 billion transaction.
It's not the only stock repurchase that was announced on Wednesday. Chemical giant DuPont's (DD) board authorized a $1 billion share repurchase program. Earlier this month, Sirius XM Radio (SIRI) turned heads by authorizing a $2 billion buyback.
These are substantial commitments by companies to eat their own cooking, but you haven't seen anything yet. Just wait until next month.
I'm not going out on much of a limb by calling 2013 the year of the buyback. All of the companies that have been busy digging into their coffers for accelerated and special dividends this month won't have much of an incentive come January. If anything, companies declaring special distributions early next year will be ridiculed for not pulling off the transaction in 2012.
Companies return money to their shareholders through dividends and buybacks. Now that we're weeks away from dividends being less lucrative to investors in taxable accounts, the shift will turn to repurchases.
Investors should be grateful.
Next year will be challenging. Regardless of which way the fiscal cliff situation plays out, there will be plenty of belt-tightening next year. Companies will be more cautious with their investments, and earnings growth may be harder to come by. Stock buybacks are perfect in that regard. Hacking away at the number of shares outstanding results in higher earnings on a per-share basis.
Some companies will have extenuating circumstances for going the buyback route. Sirius XM Radio is simply arming itself to respond to an inevitable spinoff. DuPont is deploying money that won't be used in the near term. In a Reuters interview on Wednesday, DuPont CEO Ellen Kullman said that the chemical giant will spend less on capital projects in 2013 as a result of fiscal cliff uncertainty.
Next year, the buybacks won't need a reason. Companies will want to deploy money in a manner that enhances bottom-line results, and nothing does that on a per-share basis as well as buybacks.
If you think the dividend deluge was something this month, just wait until you see what's beating on next month's umbrella.
Checks and balances
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