The Association of U S West Retirees



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 comment.)

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 profit-making abilities.

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 303-954-2648 or