When dividends are . . . or are not
By David Milstead
Rocky Mountain News
Wednesday, February 20, 2008
Qwest shareholders are getting something tomorrow that they
haven't seen in a long, long time: a dividend.
It is eagerly anticipated. Shareholders, particularly of
the US West vintage, looked at Qwest's growing cash and wondered
when it was going to share the wealth. Late last year,
Qwest acquiesced, declaring an eight-cent quarterly dividend.
Except it is not a dividend, Qwest carefully notes. It is
a "cash distribution."
Splitting hairs? Shareholders must wait until next year's
taxes, when they find out the good -- or maybe bad -- news.
Cash payments are dividends only if a company has profits to
distribute. The measuring stick is either accumulated
profits or the "current earnings" in the year of the payment,
says tax analyst Robert Willens.
If it's not a dividend, it's a "return of capital" that lowers
the cost basis of the shareholders' stock. Taxes get paid
on capital gains when the shares are sold.
Qwest isn't alone. United Airlines parent UAL has said its
recent payment is not a dividend. Regal Entertainment
Group, based here until its move to
Knoxville, Tenn., issued huge nondividend distributions
to its shareholders, including financier Phil Anschutz, soon
after going public.
If there's any question about the nature of Qwest's
distribution, the company doesn't have enough accumulated
profits for it to be a dividend. So Qwest must make
sufficient "current earnings" in 2008.
But Qwest does not believe it will have enough profits this year
to justify calling the entire payment a dividend. In a
securities filing, Qwest said the portion of its 2008
distributions that will be a return of capital will be "in the
range of 40 percent to 60 percent" of the payment.
With 1.77 billion shares outstanding, and 32 cents of payments
per share scheduled for this year, the distribution will be
about $565 million. Dividends -- and profits -- will be in
the range of $226 million to $339 million. That's less
than half of analysts' consensus estimate of GAAP earnings,
according to Bloomberg. Profits for the purpose of this
calculation can diverge from a company's net income number, but
typically not by much, Willens says. But Qwest may have
quirks making numbers incomparable. (It declines to
All this is mostly good news for shareholders, who will learn
from the company in early 2009 how to split the payment between
dividend and return of capital.
They'll get cash in hand, yet get to defer taxes on part of the
distribution. Of course, if capital gains tax rates rise
in the next presidential administration, shareholders may regret
that Qwest's eagerness to reward its shareholders outpaced its
This column is adapted from a blog item on Material
Disclosures. David Milstead and James Paton take turns writing
Up and Down 17th Street. Contact Milstead at