Corporations Rush to Reward Shareholders Before Year End

Over the past few weeks, many corporations have announced special one-time dividend payments as a way to return cash to shareholders before a possible rise in tax rates at the end of the year.  For example, Costco announced a special dividend of $7 per share, which amounts to a $3 billion outflow.  To cover the cost of the payout, the company issued $3.5 billion in debt.  While certain corporations like Costco have room on their balance sheet to add leverage to support the transaction, many do not.  These shareholder-friendly actions can be negative for bondholders, as corporations are adding debt and reducing cash.  This year, companies have issued a record amount of bonds, and, as we wrote a few weeks ago, credit metrics are back to pre-2008 levels.  In this environment, we are treading carefully in the corporate market, as, in many cases, bondholders are not being adequately compensated for taking increasing risk.