Unexpectedly Intriguing!
June 5, 2013

How much money did U.S. investors raid from the future following President Barack Obama's re-election on 6 November 2012?

We've long noted the tax-avoidance motive that investors had for taking this action, as well as the factors that drove its timing, but we've never fully quantified just how much money was involved in the great dividend raid of 2012.

Until today, that is! Our first chart shows how the amount of S&P 500 dividends per share expected to be paid out the fourth quarter of 2012 and the first three quarters of 2013 changed in the period from 21 September 2012 to 21 December 2012, while the chart immediately below it shows how the value for the S&P 500 changed during this period as well. We selected this three month long period because it covers all the time from the expiration of the dividend futures contract for 2012-Q3 on the third Friday of September 2012 through the expiration of the dividend futures contract for 2012-Q4 on the third Friday of December 2012.

S&P 500 Expected Dividends per Share for Future Quarters (Top) and S&P 500 Index Value (Bottom), 21 September 2012 through 21 December 2012

The Great Dividend Raid took place from 15 November 2012 through 18 December 2012, which we can see in the changing values of each of the quarterly dividends per share expected for 2012-Q4, 2013-Q1, 2013-Q2 and 2013-Q3. During this period, cash that had been put aside to pay dividends in the future quarters of 2013 were pulled out of those accounts to instead be paid out to investors in the fourth quarter of 2012.

Our next chart reveals the amount of dividends per share that were transferred from 2013 to the fourth quarter of 2012:

Amount and Source of Future Dividends per Share Transferred into 2012-Q4 to Avoid Higher Dividend Tax Rates in 2013

Here, we find that some 60.5 cents per share worth of dividends was transferred from the funds meant to pay dividends in 2013 into 2012-Q4's dividend total instead. 62.5% (37.8 cents per share) of this amount came from the funds established to pay dividends to investors in 2013-Q1, 19.8% (12 cents per share) came from the funds to pay 2013-Q2's dividends and the remaining 17.7% (10.7 cents per share) was raided from the funds set to pay dividends in 2013-Q3.

That's the per-share total, but how much money is that exactly? To find out, we estimated the equivalent number of shares for the entire S&P 500 by taking the total market capitalization of the S&P 500 on 31 October 2012 ($13,372,974,540,810) and 31 December 2012 ($13,630,242,851,346) and dividing these values by the closing value of the S&P 500 on those days ($1,412.16 on 31 October 2012 and $1,426.19 on 31 December 2012). Doing this math gives us an equivalent number of shares for the S&P 500 of 9,469,872,069 and 9,557,101,684 for each date respectively. We then calculated the arithmetic mean of these values, which gives us the average equivalent number of shares for the S&P during our period of interest of 9,513,486,877 equivalent shares.

Multiplying 9,513,486,877 shares by 60.5 cents per share then reveals that approximately $5,755,659,560 ($5.76 billion) worth of dividends were pulled from 2013 into 2012, thus avoiding the higher dividend tax rates that were guaranteed to take effect in 2013.

Assuming these are all qualified dividends, which would be taxed at 2012's maximum dividend tax rate of 15%, the U.S. federal government saw an extra $863,348,934 ($863 million) worth of tax revenue for 2012 as a result of this action.

If this money had been taxed at the maximum rate of 43.6% that S&P 500 investors risked facing in 2013 if U.S. companies had not taken this action, the federal government would have added as much as $2,509,467,568 ($2.5 billion) to its tax collections for the 2013 tax year. We therefore find that investors actually saved as much as $1,646,118,634 ($1.6 billion) of the money they earned through the companies they own by raiding their future dividends to avoid the future's higher tax rates, which were guaranteed with the re-election of Barack Obama as U.S. President.

Fortunately, the future for taxes on dividends played out differently than this outcome, as the fiscal cliff tax deal on 3 January 2013 set the maximum tax rate for dividends in the U.S. at 23.8%. Going by that measure, S&P 500 investors still collectively saved as much as $483,475,403 by pulling these dividends into 2012 from 2013. That tax deal also changed the relative desirability of dividends with respect to wage and salary income, which is what really lies behind the rally in stock prices that ran from 3 January 2013 into April 2013, but that's a different story....

On a closing note, let's revisit our 11 February 2013 chart showing how the changes in the rate of growth of dividends per share and stock prices fared for each of these quarters during the period of the Great Dividend Raid of 2012:

Change in Growth Rates of Expected Future Quarterly Dividends per Share and 20-Day Moving Average of S&P 500 Stock Prices

Reviewing all the charts that we have presented, we find that there is no correlation between changes in stock prices and the timing of when the Federal Reserve's various changes in the implementation of its quantitative easing programs occurred during these final months of 2012. We therefore find that the Fed's QE programs had virtually no impact upon stock prices during this period.

We do however recognize a rather screaming correlation between changes in dividends per share and stock prices during the period of the Great Dividend Raid. Here, we find that the timing of the stock market rally beginning on 15 November 2012 follows the shifting of cash dividends from being paid in the future quarters of 2013 to be paid instead before the end of 2012. We recognize that the change in the amount of dividends expected to be paid in 2012-Q4 triggered the change in stock prices because the dividend futures for 15 November 2012 were actually recorded after the U.S. stock market closed on 14 November 2012, many hours prior to the beginning of trading the next day. The sequence of this timing establishes the role of changing expectations for future dividends as the primary causal factor in driving changes of stock prices (and really, is simply a recent but prominent example of the direction of causality.)

In addition, we recognize that the actual changes in the growth rate of stock prices directly paced the changes in the year-over-year growth rate of dividends per share expected for 2012-Q4 during the period of the rally, further demonstrating the role that expected future dividends play as the fundamental driver of stock prices.

It's not often we have sufficient data to junk the "correlation does not imply causation" caveat for analysis, while also debunking a widely held view that the Fed's latest QE programs may be causing a bubble to inflate in stock prices and simultaneously validating our theory and math for describing how stock prices really work.

Seeking Alpha commenters who want to know more should begin accessing our archives here.

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