The Rebirth of Dividends

President Bush wants to do away with taxes on dividends; plan would likely lead to more dividends, fewer buybacks. Plus: Borrowing binge is on, and EDS hires ex-Webvan man as new CFO.


The speculation is over.

On Tuesday, President Bush unveiled his economic stimulus plan. As predicted, part of the $674 billion plan calls for the elimination of taxes investors pay on dividends.

“The role of government is not to manage or to control the economy from Washington, D.C., but to remove obstacles standing in the way for faster economic growth…and those obstacles are clear,” Bush told the Economic Club of Chicago.

Citing the swelling of personal debt, a growing tax load, and rising unemployment, which “clouds our economic future,” noted Bush, “there are warning signs I won’t ignore.”

The President also proposed increasing to $75,000 the amount small businesses can write off for investments in new equipment. Currently, small business owners can write off $25,000 for purchases of new equipment.

If passed, Bush’s plan to rescind taxes on dividends will cost $364 billion in lost tax revenues over 10 years—not exactly a salve for the ever-widening deficit. But Administration officials say the elimination of double taxation on dividends could boost stock prices by at least 10 percent. Around 35 million people receive income from dividends.

Stocks surged Monday in anticipation of the announcement. The Dow Industrials slipped a bit on Tuesday, but Nasdaq finished up three-quarters of a percent as investors bet that many of the tech companies that trade on Nasdaq may institute dividends for the first time.

In fact, on Tuesday Oracle Corp. chief financial officer Jeffrey Henley told an investor conference in New York City that the database software giant’s board of directors would consider paying a regular dividend for the first time if taxes on them were removed.

“It’s quite likely [the board] will have to reconsider our policy,” said Henley, according to the Associated Press. “I think [eliminating the dividend tax] would have a significant impact on our thought process.”

However, Henley, who is one of Oracle’s 10 directors, did not outwardly endorse the move.

The company certainly could afford to pay a dividend. According to the optimal cash ranking from CFO PeerMetrix, the software vendor has $3.2 billion in cash on hand. Throw in short-term investments, and Oracle currently has more than $5 billion in available funds.

Henley reportedly said that in the past the company preferred to use this cache to repurchase stock, since buybacks were “more tax efficient.”

Generally speaking, dividends are the domain of large-cap companies. Last year, for instance, 350 of the companies included in the S&P 500 paid dividends. According to Standard & Poor’s, the share prices of those dividend-payers dropped about 13 percent in 2002, compared with a 30 percent drop by nondividend-payers.

Other provisions of Bush’s stimulus package call for the acceleration of across-the-board rate cuts and a $400-per-child increase in the tax credit for families with children.

In addition, about $3.6 billion would be provided to states to help create so-called personal reemployment accounts for people having trouble finding a job.

The plan would also expand the 10 percent tax bracket to the first $7,000 in income, up from $6,000. It would also fully implement tax breaks for married couples and immediately expand the child tax credit to $1,000 from the current $600.

New Debt Offerings Top $6 Billion

As noted yesterday (“2003: The Year of Borrowing Heavily?”), corporates are likely to go heavy into the debt markets this year. That expected borrowing binge began on Monday, then intensified yesterday.

Five companies borrowed more than $6 billion on Tuesday. Another $2.5 billion or so of debt is expected to come to market by the end of the week, according to reports.

Although the underwriting calendar is typically heavy this time of year after a slow holiday period, the feeling among market watchers is that many companies are looking to lock in historically low rates as the economy recovers.

“The consensus view is that interest rates will rise and that the economy has already bottomed,” Mike Stafford of Legg Mason Investment Advisors told Reuters. “Companies may be worried about rates rising, so they want to get new issues off as soon as they can.”

Investors are eagerly scooping up this paper. In fact, corporate bond mutual funds pulled in more than $1 billion a week in December, according to Mutual Funds Trim Tabs.

As a result, the average investment-grade corporate bond currently yields 5.25 percent, or 1.78 percentage points more than U.S. Treasuries with similar maturities, according to Merrill Lynch & Co. Just 11 weeks ago, the average yield was 1 percentage point higher. In addition, the spread has narrowed from 2.67 percentage points on October 10.

On Tuesday, Comcast raised $1.5 billion in a two-part offering. The largest U.S. cable-TV operator issued $600 million in notes due in 2010, priced to yield 5.874 percent, or 227 basis points more than comparable Treasuries, and $900 million in notes due in 2015, priced to yield 6.535 percent, or 252 points over Treasuries.

Proceeds will be used to repay short-term debt incurred in connection with the November 2002 merger of Comcast’s and AT&T’s broadband businesses, the company noted.

JP Morgan, Merrill Lynch & Co., and Morgan Stanley led the offering, which was rated Baa3 by Moody’s and BBB by Standard & Poor’s.

Bank One trotted out $1 billion in five-year global notes, led, of course, by Banc One Capital Markets Inc. The size of the deal was increased from an originally planned $750 million. The notes were priced to yield 3.749 percent, or 76 points over Treasuries, and were rated Aa2/A-plus.

Household Finance Corp., the finance arm of Household International Inc., issued $1.75 billion in debt in two parts, up from an originally planned $1.5 billion.

The offering included $1.25 billion in five-year notes, priced at 175 points over Treasuries, and $500 million in a reopening of already-existing 6.375 percent notes due in November 2012, priced at 175 points over Treasuries. Both issues were rated A2 by Moody’s and A-minus by S&P.

John Deere Capital Corp., a unit of Deere & Co., issued $1.5 billion in debt in a two-part global sale, up from an originally planned $1.25 billion.

Led by Banc of America Securities, Credit Suisse First Boston, and Deutsche Bank Securities, the offering consisted of $850 million in 5-year notes, priced at 97 points over Treasuries, and $650 million in 10-year notes, priced at 112.5 points over Treasuries.

And Principal Finance Group Inc., the biggest seller of 401(k) plans, issued $300 million in 10-year notes, priced to yield 125 percentage points more than Treasuries.

On Monday three companies borrowed a total of $2.8 billion, including Goldman Sachs and Clear Channel Communications Inc.

Other companies expected to tap the debt market this week include ASIF Global Financing, Cendant Corp., and Trump Hotels & Casino Resorts Inc.

Meanwhile, Tyco International Ltd. reportedly boosted the size of its planned convertible notes sale by $500 million (to $3.75 billion) to meet investor demand.

This is the largest convertible securities offering since Amgen Inc. issued $3.9 billion of convertible debt last January.

And in yet more financing news, Moody’s upgraded the senior unsecured debt ratings of Levi Strauss & Co. to B3 from Caa1. In addition, the B2 senior implied rating and the B1 rating on Levi’s existing bank facility were confirmed.

“The rating actions reflect improvement in the company’s liquidity from the recent issuance of $425 million in new senior unsecured notes,” the rating agency said. “Proceeds from the notes, together with proceeds from a new revolving credit facility and term loan (both unrated and currently in syndication) should be sufficient to retire near-term debt maturities and fund increased working capital needs in 2003.”

Ex—Webvan Finance Chief Named EDS CFO

EDS is shaking up its finance team.

The embattled data-services company, which recently stunned Wall Street when it warned that third-quarter earnings would come in way below forecasts, has named Robert H. Swan as its new chief financial officer. Swan replaces Jim Daley, who resigned from the post but will remain with the company, according to Reuters.

Swan, who officially takes over February 10, joins EDS from TRW Inc., where he has served as executive vice president and CFO since 2001. During his career, Swan also served as CFO for three General Electric Co. units: GE Lighting, GE Medical Systems—Europe, and GE Transportation Systems.

“Bob Swan brings EDS years of blue chip financial experience, including serving as CFO for a Fortune 500 company,” said chairman and CEO Dick Brown in a statement. “His expertise, experience and energy blend well with the practices Jim Daley has implemented over the past four years. The ability to bring Bob in now strengthens the leadership team, ensures an effective transition in Finance and gives Jim—who has been crucial in the realignment of EDS—the opportunity to continue serving the company in new areas.”

Swan joined TRW in 2001 after two years with Webvan Group, the online food retailer. At Webvan, Swan served as CFO, chief operating officer, and, finally, chief executive officer.

At TRW, he was responsible for all domestic and international financial operations, treasury, tax, investor relations, internal audit, shareholder services, risk management, pension accounting, information systems, and business development. He also was a member of the TRW management committee.

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