Costco to pay out $3 billion in special dividend

(Reuters) - Retailer Costco Wholesale Corp said it would pay a special dividend totaling roughly $3 billion, the largest payout so far from any company ahead of a likely increase in the U.S. dividend tax.

The warehouse club operator also posted higher-than-expected November sales on Wednesday. Its shares rose 5.6 percent to $101.96 in afternoon trading.

Several companies have declared one-time cash payouts in recent days ahead of a likely increase in the dividend tax rate due to the so-called fiscal cliff - a combination of tax increases and spending cuts due to kick in at the beginning of 2013 if Congress and the White House cannot agree on a plan to reduce the federal budget deficit.

Costco Chief Executive Officer Craig Jelinek discussed the issue with President Barack Obama on November 17.

"I expressed strong support for the president's efforts to reach a compromise with Congress before the end of the year that avoids any tax increase on middle-class taxpayers," Jelinek said in a November 19 statement that did not mention dividends.

In some cases, insiders are among the biggest beneficiaries of the special payouts as well as shifts of regular dividends into 2012 from 2013.

That is not the case at Costco, which is known for keeping prices low while paying wages and providing benefits above the retail average.

Co-founder Jim Sinegal, who left his position as chief executive officer on his 76th birthday in January, is the chain's 33rd-largest shareholder. However, he is also the company's biggest individual owner, with about 2 million shares, according to Thomson Reuters data.

By contrast, Las Vegas Sands Corp Chairman Sheldon Adelson, a billionaire Republican donor, and his family stand to get more than half of the casino developer's special dividend announced on Monday. The payout totals about $2.27 billion, based on the number of outstanding shares as of September 30.

Also on Monday, Dillard's Inc announced a special dividend of $5 per share. Dillard family members are three of the top 11 shareholders at the department store operator.

On Tuesday, spirits company Brown-Forman Corp declared a $4-a-share special dividend. Two of the nine largest Brown-Forman shareholders are affiliates of the Brown family.

Wynn Resorts Ltd paid a dividend of $8 per share, including a regular 50-cent payout, in early November, ahead of the possible tax increase. Chief Executive Officer Stephen Wynn and his ex-wife, Elaine, each individually own nearly 10 percent of the stock.

Costco's dividend is worth nearly $3.07 billion, based on the number of shares outstanding as of early September, the end of the company's fourth quarter.

Costco shareholders have done well since the worst of the financial crisis. The shares are up 56.7 percent since end of September 2008, compared with a 20.4 percent increase in the Standard & Poor's 500 index.

Special dividends "make a lot of sense right now" given the looming tax increase, and other companies may follow suit, said Randy Warren, chief investment officer of Warren Financial Service, a registered investment advisory firm.

"We might even see something from some tech companies, some of the giants that have a lot of cash on their balance sheets, companies like Apple, Microsoft and Cisco," he said.

Warren's holdings include Costco, Apple Inc, Microsoft Corp and Cisco Systems Inc.

LOTS OF CASH

Costco had cash and short-term investments of about $4.8 billion on September 2, and the access to credit markets necessary to make a large payout.

The company's cash balance before the special dividend "was truly excessive," said BMO Capital Markets analyst Karen Short, adding that the payout should not curb future store openings.

The third item on Costco's code of ethics is to "take care of our employees." Fifth on the five-point list, the company's "ultimate goal" is to "reward our shareholders."

"Our strong balance sheet and favorable access to the credit markets allow us to provide shareholders with this dividend," Chief Financial Officer Richard Galanti said in a statement.

Galanti, like many at Costco, has been there for years. He has been CFO since 1985, and CEO Jelinek joined the company in 1984. Workers at Costco's massive stores often display the year they joined the company on their badges.

Costco keeps expenses low, everywhere from its Issaquah, Washington, headquarters to stores, where shoppers who pay annual membership fees of up to $110 carry purchases out in their own bags or reused cardboard boxes.

The hot-dog-and-fountain-drink combo sold at Costco's food courts is a longstanding signal of the chain's focus on low prices. The combo has cost $1.50 since Costco started selling hot dogs from a cart in 1985.

Costco, which raised its regular quarterly dividend to 27.5 cents per share earlier this year, plans to hold a conference call to discuss its special dividend later Wednesday and did not immediately return calls seeking more details.

On November 19, Costco's biggest rival, Wal-Mart Stores Inc, moved its planned dividend to late December from early January to help shareholders avoid any increase in the tax rate. [ID:nL4N08Z3CB] The family of founder Sam Walton owns just over half of the company's shares.

Costco will pay its special dividend on December 18 to shareholders of record on December 10.

November sales at Costco stores open at least a year rose 6 percent, topping the analysts' forecast of 5.4 percent growth, according to Thomson Reuters I/B/E/S. Net sales rose 9 percent to $8.15 billion in the four weeks to November 25.

(Reporting by Jessica Wohl, Brad Dorfman and Sakthi Prasad; Editing by Dan Lalor, Maureen Bavdek, John Wallace and Lisa Von Ahn)