Costco gives shareholders a special gift

Costco will pay a $7 a share special dividend before year end as it looks to return cash to shareholders in advance of what is expected to be a 2013 tax increase on dividend payments.

The total payout will amount to about $3 billion and is extraordinarily generous. Especially considering Costco’s net cash provided by operating activities for its fiscal year ended September 2, was only slightly more than $3 billion and cash, cash equivalents and short term investments totaled $4.854 billion.

The payout also is somewhat ironic considering Costco founder and board member Jim Sinegal was an ardent supporter of President Barack Obama’s re-election and the view that millionaires and billionaires can afford to pay more in taxes to help the nation avoid going over the fiscal cliff. Now, Costco is helping shareholders who meet the administration’s definition of wealth avoid paying the increased taxes Sinegal indicated were fair during the election by rushing to pay a special dividend before a rates increase kicks in. Costco currently offers a relatively modest dividend yield with a $1.03 annual payout and a share price hovering around $100.

In explaining the rational for the $7 special dividend, Costco CFO Richard Galanti did not mention the imminent tax increase as a motivating factor but alluded to the possibility that credit markets would be accessed to provide funding.

"Today's announcement of a $7 special dividend, to be paid before the end of the calendar year, is our latest effort in returning capital to our shareholders while maintaining our conservative capital structure," Galanti said. "Our strong balance sheet and favorable access to the credit markets allow us to provide shareholders with this dividend, while also preserving financial and operational flexibility to grow our business globally; allowing for ongoing dividend and share repurchase activities; and enhancing the value of the Costco membership to the more than 67 million Costco cardholders throughout the world."

Disclosure of the dividend was made in conjunction with the release of monthly sales and interestingly follows a telephone conversation Costco CEO Craig Jelinek said he had with President Obama on Saturday, November 17. Jelinek said the conversation was part of the administration's outreach to the business community to discuss current economic conditions and fiscal policy issues.

"I expressed strong support for the President's efforts to reach a compromise with Congress before the end of the year that avoids any tax increase on middle class taxpayers," Jelinek said. "Costco employs over 115,000 workers in the U.S., most of whom are middle class family wage earners. Likewise, the small businesses that make up the bulk of our business members employ thousands of working people who have borne the brunt of the recession. Now, with signs pointing to a modest economic recovery, it would be a particular burden on those working families to face higher income taxes."

Jelinek said he encouraged the President to continue working with Congressional leadership to find a balanced solution to the deficit that will avoid middle class tax increases and that it was imperative both sides of the aisle compromise to eliminate uncertainty and allow for continued economic recovery.