CHICAGO--(BUSINESS WIRE)--Uncertainty over the future direction of U.S. tax policy, reinforced by concerns surrounding the outcome of "fiscal cliff" negotiations, is forcing some U.S. financial institutions to rethink dividend policies, in some cases leading to special dividend payouts before the end of the year.
Fitch sees recent decisions by institutions, such as TD Ameritrade and Capital Source, to pay special dividends to shareholders in December as significant. These moves highlight the need for many institutions to re-assess cash distribution strategies if dividend tax treatment changes substantially in the new year. Absent a budget deal, favorable tax treatment for dividend income is set to end in 2013, with rates increasing from the current level of 15% to as much as 43% if dividends are treated as ordinary income.
While the largest U.S. banks will not be announcing any changes in dividend or share repurchase plans prior to the conclusion of the 2013 C-CAR capital adequacy review by regulators, major changes in dividend tax treatment could ultimately lead to a rethink of optimal cash allocation by banks considering a return of cash to shareholders. All else equal, a sharp increase in the tax rate on dividend income could push more institutions to favor share buybacks over dividends in future years.
We believe some of the recent dividend announcements by smaller institutions also reflect a reflect the fact that alternative uses of cash, including organic growth and M&A, offer less attractive returns than dividends or share repurchases.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.