Dividend Plan: Go Figure

Proposal sure to revive business--for accountants; which companies actually qualify? Elsewhere: Expensing of options near end of its 15 minutes. Plus: Berardino still on the hook in Enron case. And: Disney exec comp on parade.


Politicians seem to have a real tough time proposing legislation that’s simple and clear-cut. Instead, they often include exceptions and conditions that tend to overly complicate things.

Case in point: President Bush’s bid to remove taxation at the individual level for corporate dividends. In fact, even during his State of the Union message last night, the President took time out to say, “I ask to end the unfair double taxation of dividends.”

On the surface, a great idea for both investors and issuers. But in reality, the proposal is far from cut-and-dried. In fact, the Administration’s grand idea has already created a cottage industry of sleuths searching for all of the exceptions to the rule.

Indeed, it appears that investors in a large number of the companies that make up the Dow Industrials won’t even qualify for the proposed tax break. These are precisely the kinds of companies that come to mind when you think of dividends.

A study by Bear, Stearns & Co. found that only 11 of the 30 companies that make up the exclusive group can make completely tax-free payouts this year under Bush’s proposal terms.

Who doesn’t qualify? Four of the five members whose dividend yields are currently the highest—J.P. Morgan Chase & Co., Eastman Kodak Co., General Motors Corp., and SBC Communications Inc.

“It sounds like an accounting nightmare to me,” Suzanne Coleman, a portfolio manager with the private client group at David L. Babson & Co., said to Bloomberg. “You just can’t try to invest in these circumstances. It’s impossible to me.”

For a company’s dividend to be distributed tax free, the payout must come from the profits on which it paid federal income taxes two years ago, according to the Treasury Department.

Companies incorporated outside the United States don’t even qualify. This includes Tyco International, for example.

“As soon as I read that it would apply to dividends paid out of income that was fully taxed in the U.S., I knew there were going to be problems,” Patricia McConnell, an accounting analyst at Bear, Stearns, told the wire service.

She wrote in her report that companies that earn money outside the United States and pay taxes to another country on the profit can get credits on U.S. taxes, according to Bloomberg’s account. The income then can be added to the profit excluded from taxation when paid out as a dividend.

Foreign-earned income reinvested in a company’s foreign operations, however, doesn’t count toward its so-called excludable dividend amount, or the amount of net income that can be distributed tax free, McConnell reportedly wrote.

According to the study, just 11 Dow Industrial companies have an excludable dividend amount that’s equal to or more than their 2003 declared dividends, even though all 30 companies currently pay a dividend.

The 11 companies: Altria Group (formerly known as Philip Morris, which is currently the highest-yielding Dow stock, at 6.6 percent), Boeing, Citigroup, Walt Disney, DuPont, Home Depot, Intel, Johnson & Johnson, McDonald’s, Microsoft, and Wal-Mart Stores.

Six members would have no tax-free dividends this year: Alcoa, Eastman Kodak, Hewlett-Packard, Honeywell International, IBM, and United Technologies.

Another 12 companies would be able to provide a partial tax break on their 2003 dividend. Bear, Stearns was unable to make a determination regarding American Express Co. since it didn’t break down earnings in a way that allowed the analyst to make an estimate, according to the report.

Interestingly, even if the dividend proposal were based on earnings for 1999, when the economy was booming, just 16 of the 30 companies would have been able to offer totally tax-free dividends.

How can companies assure their dividends are totally tax free? They have two choices: they can cut the payouts to match the level of their excludable dividend amount or pay more taxes to Uncle Sam.

As Babson’s Coleman told Bloomberg: “You wonder if all of the details that people are uncovering is going to make the bill harder to pass.”

Option Play

So much for the trend toward expensing stock options.

Right after this controversial issue became a hot topic last summer, many companies rushed to announce plans to write off the value of this perk. A total of 128 companies announced their intention to expense stock options between July and October of 2002 alone.

But that fad died quickly. Just seven companies made the same decision in November and December of 2002, according to a study by Oxford Metrica.

“The jury is still very much out on expensing,” says Rory Knight, chairman of Oxford Metrica. “Concern about valuation issues is causing a lot of skepticism among companies, even those that have volunteered to expense.”

Investors also reacted differently: they seemed to better reward the companies that announced their option-expensing plans during the summer of 2002 than they did companies that offered to do so later in the year, according to the study.

Interestingly, while 21 percent of companies whose operating profits would be impacted, less than 1 percent have chosen to expense their options. But no company whose operating profit would be impacted by more than 50 percent has decided to expense stock options, according to Oxford Metrica.

Andersen Executives Let Off the Hook

A number of Arthur Andersen executives received a reprieve late Tuesday when U.S. District Court Judge Melinda Harmon dismissed a number of them from an Enron-related class-action suit.

One of the dismissed defendants was Nancy Temple, the Andersen lawyer who sent the ill-fated E-mail to Andersen employees instructing them to destroy Enron-related documents, according to Dow Jones.

The judge also dismissed claims against Donald Drefuss, James A. Friedlieb, Roger D. Willard, and Gregory W. Hale.

The big loser is Joseph Berardino. While many of the former Andersen managers were let off the hook, the judge determined that the former Andersen chief executive remains a defendant, under the “controlling person” liability.

Berardino’s not alone. Another dozen or so former top executives in Andersen’s Professional Standards Group, the firm’s oversight arm, also remain defendants. That list includes Houston-based partners Thomas Bauer, Michael Lowther, and Stephen Goddard, as well as Michael Odom, the firm’s risk-management partner. Odom received the infamous E-mail from Temple, according to Dow Jones’s account.

In December Harmon ruled that the plaintiffs could pursue their claims that some of the nation’s major banks made loans to Enron disguised as commodity trades. Those camouflaged loans allegedly served to hide the energy giant’s mounting debt from investors.

The suit also charges that Vinson & Elkins, Enron’s former principal law firm, signed off on allegedly improper deals.

ClearOne’s Fuzzy Future

Things are getting worse for ClearOne Communications Inc.

Its stock has not traded since January 21, six days after the Securities and Exchange Commission filed a complaint in U.S. District Court against the provider of multimedia conferencing products and services. The complaint also names ClearOne’s CFO and vice president of finance, Susie Strohm, as well as the company’s chairman and CEO, Frances Flood. The complaint stems from an alleged channel-stuffing scheme.

The commission charged the company and two executives with violating the antifraud, reporting, issuer books and records, and lying to auditors provisions of the federal securities laws.

The company said Tuesday its stock won’t resume trading until it satisfies Nasdaq’s request for more information.

In addition, ClearOne said the U.S. Attorney’s Office for the District of Utah has begun a criminal investigation stemming from the SEC complaint. No pleadings have been filed yet and ClearOne intends to cooperate fully with the U.S. Attorney’s Office, the company’s management added in a statement.

As is usually the case, a class-action lawsuit has been filed with the U.S. Federal Court for the District of Utah naming Flood, Strohm, and the company’s ex—chief financial officer Randall J. Wichinski as defendants.

“Similar to the complaint filed by the SEC, the class-action suit alleges violation of federal securities laws and the filing of false financial statements,” said ClearOne’s management, adding it intends to vigorously defend the company against all civil allegations.

Last week ClearOne said it initiated its own internal investigation and temporarily relieved Flood and Strohm of their duties.

Short Takes

  • Walt Disney CFO Thomas O. Staggs earned nearly $1.9 million in the most recent fiscal year. This included a $700,000 salary and a $1.175 million bonus of $750,000 in cash and $425,000 in stock units.

His boss fared a lot better. Chairman and CEO Michael Eisner earned more than $6 million, including a $5 million bonus, paid out in stock units rather than cash. President Paul Iger also took home more than $5 million, but his package included a $3 million cash bonus.

  • President Bush on Tuesday formally nominated William Donaldson to be chairman of the SEC, sending his nomination papers to the Senate.
  • Enterprise Products Partners LP Tuesday filed a shelf registration to periodically sell up to $1.5 billion in debt securities and common units. The energy company said it plans to use the net proceeds for future acquisitions and other general corporate purposes, such as working capital, investments, and the retirement of existing debt.

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