The Three Most Shareholder-Friendly Companies Ahead of the Fiscal Cliff

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the last two months, we have seen a number of companies of all sizes announce special dividends ahead of the fiscal cliff. For the most part these payments have been fairly small, but in some cases there are companies returning capital to shareholders in excess of all expectations. With that being said, I am looking at the three companies that I consider to have made the biggest moves ahead of the fiscal cliff, and may be safe heading into 2013 regardless of fiscal policy.

So why are companies making so many moves ahead of the fiscal cliff? The answer lies in the uncertainty of what will happen with corporate and personal taxes and government spending if in fact the U.S. does go off the fiscal cliff. Then there is the question of uncertainty regarding dividends. As a result of so many questions, some companies have elected to accelerate dividend payments, provide a special dividend, or have taken some other measure to give back to shareholders before the cliff.

In the past, uncertainty would have resulted in tight spending and job cuts and/or layoffs. It would not have sparked unprecedented payments to shareholders. However, there are a few companies that, despite these concerns, are electing to return shareholders cash in excessive amounts. The following shows three of the most shareholder-friendly companies despite the fiscal cliff.

 

Aside from Costco (NASDAQ: COST) being a fast-growing retail company, it also sparked much of the newfound craze for special dividends prior to the beginning of the year. On Nov. 28 the company announced a $7 dividend, or $3 billion, with a record date of Dec. 10. The company is using the proceeds from senior unsecured notes to deliver the payment -- a payment that was 7.25% of its market capitalization at the time of the announcement.

There are two reasons that Costco’s dividend announcement separated it from the rest: One, there were a lot of people who believed the company could face significant hurdles in the year ahead; this dividend provided reassurance that the company is confident about its long-term prospects. Second, the company all but promised to keep dividend "activity" and share repurchases percolating right along. This indicates to shareholders that this dividend is not just a one hit wonder, and that the company would continue to return capital to its shareholders.

CVS Caremark (NYSE: CVS) was a little late to the party, and investors were even beginning to question whether or not the company would announce a special dividend ahead of the fiscal cliff. Well, the company decided not to pay a special dividend. However, the company did better: It increased its quarterly dividend by nearly 40% and announced plans to buy back up to $4 billion worth of shares in 2013. Therefore, the total amount of additional spending in 2013, on returning capital to shareholders, is $4.3 billion, or 7.24% of its market cap.

Much like the benefits of Costco’s special dividend, CVS’ instills confidence or reassurance of its operations. Over the last several months, there have been many to question the upside of CVS due to Walgreen capturing much of its lost customers. However, in conjunction with recent data that shows CVS’ market share rising (instead of falling), the increased yield and buybacks proved to be valuable to shareholders. Overall, the company looks to have distinctive positioning in the industry, and the board wasn’t afraid to flex its muscles by returning an excessive amount of capital to its shareholders.

The final company of the three, which made the most impressive actions to benefit investors, was Seagate Technology (NASDAQ: STX). The company did not announce a special dividend, but rather increased its regular quarterly dividend by 19%. This might not sound significant, however keep in mind that its forward yield is now an industry-leading 6.0%! Furthermore, the company reiterated its plan to return 50% of its free cash flow to shareholders, indicating that it will continue to not only pay a market leading yield but also buy back shares. Over the last 12 months, Seagate has posted free cash flow of $2.27 billion. Therefore, it is likely that the company will return more than $1 billion to shareholders, or a market-leading 10.71% of its market cap, indicating $500 million in buybacks.

In the last two years, Seagate has been among the most investor-friendly companies in the market, constantly buyback shares and increasing its dividend. However, some investors had expected the company to pull back these payments in 2013 due to trouble in the hard disk drive market. Not only did the company not pull back, but it is increasing its payments. Over the course of time this should create significant value, as investors look for high-yield, undervalued companies in the market once the fiscal cliff concerns come to an end.

There have been countless companies in the last two months to make moves to instill confidence in investors, but none more so than these three companies. All three took drastic measures to ensure optimism, indicating that no matter what happens with the fiscal cliff they are confident in the prospects of the future. Therefore, regardless of the potential for 50% dividend taxes, higher taxes on large corporations, and less disposable income for consumers, these companies are not willing to let uncertainty dictate their operations and feel confident about the future.  


BrianNichols is long STX. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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