With only weeks to go, American businesses are bracing for the impact of the "fiscal cliff" in major ways. Fear of a sudden increase in tax rates on Jan. 1 is driving a range of business actions from a steep drop in hiring plans to a record wave of special stock dividends and corporate borrowings aimed at enabling investors to take advantage before a possible tax hike.
Among those scrambling ahead of the deadline are the nation's manufacturers, who reported their first drop in hiring plans in three years last month, with many citing concerns about the prospect of tax increases and deep spending cuts if the White House and Congress fail to reach a long-term budget deal.
"The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed," one producer of fabricated metals told the Institute for Supply Management in its survey of manufacturers last month. A petroleum and coal producer told the institute that it expects federal tax and budget policies to be its biggest business concerns for the next year or so.
The institute's report, which showed that manufacturing fell back into recession territory last month, "is a clear indication of the negative impact that the looming fiscal cliff is already having on our economy," said Chad Moutray, chief economist for the National Association of Manufacturers.
"Manufacturers remain extremely nervous about the direction of the economy," he said. "Without a resolution to the fiscal cliff, the economy will remain weak and stagnant."
Beyond manufacturing, hundreds of businesses have specifically cited concerns about the fiscal cliff in their earnings reports and filings with the Securities and Exchange Commission in recent weeks.
The stock market has been whipsawed since Election Day by every leak or statement emerging from the budget negotiations between congressional leaders and the White House. Now it is getting hit by an element that is at least temporarily buoying the market: a record wave of special dividends and stock buybacks planned before the end of the year to enable investors to take advantage of lower tax rates on dividends and capital gains.
Corporations such as Wal-Mart Stores Inc. and Oracle Corp. are leading the parade of businesses making one-time dividend payments estimated to be as much as $100 billion. Wal-Mart, the world's biggest retailer, is moving up a dividend originally scheduled for January so investors can take advantage of this year's 15 percent tax rate on dividends, which is set to nearly triple to 43.4 percent for high-earning taxpayers next year if the government reaches the fiscal cliff. Oracle is combining three quarterly dividend payments originally scheduled for 2013 into one big payment this month.
Whole Foods Market Inc., Las Vegas Sands Corp., Walt Disney Co., Carnival Corp. and Costco Wholesale Corp. are among the many corporations issuing special dividends or moving up their regularly scheduled dividend payouts. Most dividends are financed with cash profits, but Carnival, Costco and some other companies are issuing bonds to finance their special dividends and stock buybacks.
From the end of September to mid-November, 59 companies in the Russell 3000 stock index declared one-time cash payments to shareholders, a fourfold increase from about 15 in the year-earlier period, according to data compiled by Bloomberg.
Jeffrey Kleintop, chief market strategist at LPL Financial Holdings Inc., called it the "Powerball payout" for investors.
"The potential tripling of tax rates on dividends has prompted a response among corporations," he said. He noted that U.S. corporations are sitting on record levels of cash profits and have been hesitant to use the money to hire and invest in new plants, so they are willing to distribute itinstead in special payments to their stockholders.
Mr. Kleintop said he does not expect the dividend tax to increase as much as the many corporations appear to be anticipating. He noted that a bill that passed the Democrat-led Senate this year would raise the top rates for capital gains and dividends to 20 percent — not that big of a hike. Republicans likely would accept this as a compromise, he said.
'Tax rates matter'
While some companies are showering their shareholders with dividends, others are using their hoards of cash and are borrowing money to buy back company stock, under the assumption that debt will receive more favorable tax treatment next year than equity, Mr. Kleintop said. Corporate bond issuance surged to $120 billion last month — the second-highest monthly total on record — to fund such stock buybacks, he said.
"Tax rates matter significantly," as seen by the flurry of activity in financial markets, said Andrew B. Busch, global strategist at BMO Capital Markets Inc. He also attributes a wave of stock offerings to worries about tax rates rising next year.
"Amazing things are happening, all surrounding the fiscal cliff," he said.
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