So what do Vice President Joe Biden and I have in common? We both have a Costco card.
It’s true. If you follow the blog (or me on @twitter), you know that I recently moved out of the city. And once here, I consulted my “What to do when you move into the suburbs” handbook and along with “ditch the all-black wardrobe,” I realized that I needed to get a Costco card.
Before this month, I had never set foot inside of a Costco. I was clearly in the minority on this. Now that I have the card, it’s like being a member of some special club: all the cool kids are doing it. Including, apparently, Vice President Biden who confessed not only to having a card but also did some holiday shopping at the mega-store for pies.
Costco is making news these days for more than just being a draw to Biden. In the midst of protests against Walmart for what was characterized as unfair working conditions, a 2005 piece from the NY Times circulated, which had proclaimed Costco the “Anti-Walmart.” The article noted, among other things, that the average pay of an employee at Costco was considerably higher than that at Sam’s Club (Walmart’s answer to warehouse shopping) and that benefits were higher than the norm for retailers. The biggest criticism in the article? The comment from analyst Bill Dreher of Deutsche Bank that at Costco “it’s better to be an employee or a customer than a shareholder.”
That may be changing.
With profits up at the retail warehouse, business is booming. Which, of course, means that controversy can’t be far behind.
This week, Costco announced that it would pay a $3 billion dividend to its shareholders by year-end. That dividend works out to a generous $7 a share. Nice, right?
What left some folks scratching their heads was that Costco is borrowing money to finance the dividend. Yep, borrowing. It almost doesn’t make sense. Almost. On paper, it may be confusing but in the tax world, it’s genius. Costco is throwing its shareholders a lovely, chewy tax bone. Taking the dividend now means that they can be taxed at special dividends rates – the current capital gains rates – of up to 15%. If Costco were to push the dividend off until, say, January 1, shareholders would pay at ordinary income tax rates. For those high-income taxpayers, that means a rate of up to 43.4% on dividends: 39.6% ordinary income tax rates + the 3.8% Medicare tax. But by taking a dividend now, those same shareholders only pay 15%.
That has to make CEO Jim Sinegal happy. The notoriously thrifty Sinegal was pulling in a mere $350,000 in his last year CEO of the company: considerably less than what similarly situated CEOs were earning.
Sinegal has amassed quite a chunk of Costco stock. He, together with his wife, own more than 2,000,000 shares (the only other stock he owns is Warren Buffett’s Berkshire Hathaway). That works out to about $14 million in dividends. By taking the dividend now, Sinegal will pay about $2,100,000 in tax, pocketing just under $12 million. If he took that level of dividend in just a few months, he would pay nearly three times that much in tax, or $6,076,000.
Interestingly, Sinegal is being demonized for the move since he will benefit from the early distribution after having previously touted the idea of tax fairness at the Democratic National Convention. But I’m not sure that characterization is fair – especially considering that he was criticized previously for not making larger payouts to shareholders.
Planning for tax changes is smart, not diabolical. I’ve been telling my clients – no matter where they fall on the income tax spectrum – that they should plan for tax changes now to the extent possible. It’s an interesting position, I think, to claim that planning for tax savings is okay so long as you’re not wealthy. Wouldn’t we all take the opportunity to save now if we could?
Just like Vice President Biden and me, I think it’s okay for shareholders to want a bargain.
