What Will be the Impact of Higher Dividend Taxes on Dividend-Paying Stocks?

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Currently the top U.S. tax rate on qualified dividends is 15%. This rate applies to tax-payers who are in the 25% to 35% tax brackets. This means that hypothetically an ordinary American in the 25% tax bracket having an earned income of $50,000 and getting a $1,000 in qualified dividends pays $150 in dividend taxes and a multi-millionaire in the highest tax bracket of 35%  having an earned income of $120.0 million and getting the same $1,000 in qualified dividends also pays $150 in dividend taxes.  Qualified dividends are dividends earned from stocks held for more than one year 60 days. This low dividend tax rate is set to expire on Dec 31, 2012 unless Congress extends the current tax rates.

The Wall Street Journal’s Jason Zweig discussed this issue in an article last month. From Dividends: Start Screaming:

At one second after midnight on Jan. 1, 2013, the maximum tax rate on dividends is likely to go from 15% to either 18.8% or 43.4%. The best-case scenario: Congress retains the top dividend-income tax rate of 15%, and the only increase is the scheduled 3.8% surtax on investment income for high earners. The worst case: Congress decides dividends are to be taxed at ordinary-income rates, and the highest rate jumps to 39.6%, plus the same 3.8% surtax.

The payout ratio for U.S. companies is near the all-time low of 34%. Here is another interesting quote mentioned in the article:

C.J. MacDonald, a portfolio manager at Westwood Holdings, an investment firm in Dallas, points out that companies paid out roughly 60% of their earnings as dividends in 1960—even though the tax rate on dividends topped out then at a confiscatory 91%.

So U.S. firms paid out a larger portion of their earnings even when the top dividend tax rate stood at 91% compared to the low rate now and they did not withhold profits due to the higher taxes for shareholders.

What will be the impact of a higher tax rate on dividends for dividend-paying stocks?

The investment advisory firm of Miller/Howard Investments, Inc. has published a white paper analyzing the answer to the above question. The paper states that it will not matter for investors in dividend stocks if the tax regime changes.

The research paper referenced a Federal Reserve study where the authors analyzed the effect of tax changes using US stock market vs. European markets, US stock market vs. REITs (as the tax cut did not benefit income from REITs), and high-yield dividend stocks (3% yield and greater) vs. low-yield stocks and non-dividend payers. Their conclusions were:

  • There was little if any imprint of the dividend tax cut on the value of the aggregate stock market.
  • High-yield stocks did receive a boost but the effects were short-lived.
  • REITs dropped on the day before bill was signed but recovered within days.
  • A substantial portion of US stocks were held in accounts or entities for which the lower dividend tax rate did not apply.

Similar to the top dividend tax rate at 15%, the top long-term capital gains tax rate is also 15% for investors in the 25% or higher tax-brackets. Long-term capital gains applies to gains from assets held for over one year.

How did dividend-paying perform when the capital gains tax rate and dividend tax rates were different?

The following chart from Ned Davis Research comparing the performance of dividend-payers and non-dividend payers over different tax regimes in the past offers the answer:

Click to enlarge

 

via Ned Davis Research

The chart shows that there was no impact on the performance of dividend-paying stocks even with beneficial capital gains tax rate over dividend tax rate.

Source:  A dividend tax hike? What does it mean for dividend-paying stocks?, Miller/Howard Investments, Inc.

I agree that any tax changes on dividends after Dec 31, 2012 will not affect the performance of dividend stocks. Even though there may be a slight impact in the short-term, prices should recover quickly. Another factor that must be considered is that most of the stocks are held in non-taxable retirement accounts such as 401(K), IRAs etc. where earnings grow tax-free until withdrawn.Hence in summary, dividend investors need not worry too much about any tax law changes. Instead of wondering about what Congress might do, investors can take advantage of the current lower dividend stock prices and add to their portfolios now through the rest of the year.

Related ETFs:

iShares Dow Jones Select Dividend ETF (DVY)
SPDR S&P Dividend ETF (SDY)
Vanguard Dividend Appreciation ETF (VIG)
Vanguard High Dividend Yield ETF (VYM)

Disclosure: No Positions

A Review of Six Global Coca-Cola Bottlers

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The Coca-Cola Company trading under the ticker KO is different from the bottler Coca-Cola Enterprises Inc trading under the ticker CCE on the NYSE. As a multi-national company, Coca-Cola has bottlers in many countries of the world and each operate as an independent company and their stocks trade under separate tickers. In this post, lets take a quick look at six of such bottlers. These companies hold exclusive rights to bottle, market and distribute Coca-Cola products in specific regions.

1.Coca Cola FEMSA SAB de CV (KOF):

Mexico-based Coca-Cola FEMSA  operates 35 bottling facilities in Latin America and serves more than 1,700,000 retailers in the region. The company engages in the production and distribution of many products such as bottled water, Coca-Cola, Fanta, Sprite, Powerade, Delaware Punch and other branded beverages of The Coca-Cola Company in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina.

In its most recent quarter net profit rose by 54% on sales of 36.19 billion Mexican pesos. The ADR has a market capitalization of $6.0 billion and a current dividend yield of 1.45%. As can be seen in the chart below, the stock has had an solid run with a $10,000 investment five years ago worth about $34,244 now.

2.Coca-Cola Hellenic Bottling Co SA (CCH):

Based in Greece, Coca-Cola Hellenic Bottling Co SA produces and distributes Coca-Cola products in 27 countries in Europe and Nigeria. The products marketed by the company include Coca-Cola, Coca-Cola Light (diet Coke), Fanta and Sprite; brands such as Amita, Avra, Deep RiverRock and Fruice, and brands licensed by other companies such as Nestea.

For the third quarter, Coca-Cola Hellenic reported a net profit of EUR155.6 million on revenues of EUR2.03 billion. Due to the ongoing economic crisis in Europe, the company acknowledged that the environment is very challenging.

3.Embotelladora Andina S.A. (AKO.A and AKO.B):

Chile-based Embotelladora Andina SA (Andina) is the primary producer and distributor of Coca-Cola products in Chile, Brazil and Argentina. In addition, the company sells related-products such as bottled water, powdered drinks, juices, etc. Andina trades on the New York Stock Exchange under two tickers – AKO.A and AKO.B.  Currently the stock pays a dividend of over 2%.

4.Coca-Cola Amatil Ltd (CCLAY):

Coca-Cola Amatil is one of the largest bottlers of non-alcoholic beverages in the Asia-Pacific region and one of the world’s top five Coca-Cola bottlers. The company operates in Australia, New Zealand, Fiji, Indonesia and Papua New Guinea. The Coca-Cola Company owns 30% of the shares of Coca-Cola Amatil, which is also one of Australia’s ‘Top-50’ listed companies.

Trading on the OTC market in the U.S., CCLAY has a market capitalization of over $10.0 billion and a current dividend yield of 4.0%.

5.Coca-Cola West Co Ltd (CCOJY):

This company is engaged in the production and marketing of Coca-Cola products in Japan.

6. Coca-Cola Enterprises Inc (CCE):

Coca-Cola Enterprises is the anchor bottler for Coca-Cola products in Western Europe. The company serves about 170 million consumers in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden.

On total revenues of $2.07 billion in the third quarter the company reported a profit of $263 million or 89 cents a share. The current dividend yield is 2.11% and the market capitalization is $8.7 billion.

The five-year performance of four stocks noted above is shown in the chart below:

Click to enlarge

 

Source: Google Finance

Coca-Cola Femsa (KOF) beat the other stocks with a return of over 217%. In the 10-year period also, KOF was the top performer growing by over 521%.

Note: Dividend yields and market capitalizations noted are as of Nov 21, 2012.

Disclosure: No Positions

Should You Invest in Argentina Stocks Now?

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The Argentine stock market is depressed this year. Argentina’s Merval index is down 8.89% year-to-date(YTD) while Brazil’s Bovespa is up 1.4%, Chile’s IPSA is flat and Mexico’s IPC index has shot up 13.1%. The difference in performance between the Merval and the three other indices is much higher over the past 5 years.

The five-year performance of Merval against Bovespa(BVSP), IPSA(IPSA) and IPC(MXX) indices is shown below:

Click to enlarge

Source: Yahoo Finance

Argentina experienced an economic crisis from  1999 thru 2002 when the country defaulted on its debts and the economy collapsed. From 2003 thru 2007, President Néstor Kirchner, the late husband of current President  Cristina Kirchner, successfully led Argentina with a strong economic recovery. However under the Cristina Kirchner’s administration, the country is going backwards after a those years of stability and growth.

From Argentina Runs Out of Other People’s Money by Mary Anastasia O’Grady in The Wall Street Journal last week:

Mrs. Kirchner, who was elected to a second four-year term in October 2011 with 54% of the vote, appears to be in deep political trouble. To understand why, recall Prime Minister Margaret Thatcher’s 1976 warning that socialists “always run out of other people’s money.”

To the extent it has succeeded, the Kirchner economic model has relied on the 2001 default on $100 billion in debt and interest, a weak peso, protectionism, confiscation of private property, capital controls, broken contracts and high taxes. In other words, it has depended on other people’s money. Now, as Mrs. Thatcher warned, that money is running out.

In the second quarter, the economy contracted by .6% year over year. The Buenos Aires-based think tank Foundation for Latin American Economic Research (known by its Spanish initials FIEL) is forecasting 2012 GDP growth of only 1.5%. Inflation is estimated by independent economists at almost 25% annually. As salaries are adjusted upward to compensate for the loss of purchasing power, workers are being pushed into higher tax brackets. Argentines traveling abroad now have to explain their plans to government bureaucrats if they want to buy hard currency.

Add these pocketbook issues to the rising rate of violent crime, recurring corruption scandals, increasing antidemocratic efforts to silence independent media outlets and pronouncements from Mrs. Kirchner’s inner circle that it wants to amend the constitution to allow her to run for a third term. The Kirchner government has also angered labor leaders by letting it be known that it plans to shift union control of hundreds of millions of dollars in health-care premiums to the government.

In February of this year, The Economist had an critical article on Argentina’s inflation conundrum and how it would impact the country’s future. From The price of cooking the books:

Since 2007, when Guillermo Moreno, the secretary of internal trade, was sent into the statistics institute, INDEC, to tell its staff that their figures had better not show inflation shooting up, prices and the official record have parted ways. Private-sector economists and statistical offices of provincial governments show inflation two to three times higher than INDEC’s number (which only covers greater Buenos Aires). Unions, including those from the public sector, use these independent estimates when negotiating pay rises. Surveys by Torcuato di Tella University show inflation expectations running at 25-30%.

PriceStats, a specialist provider of inflation rates which produces figures for 19 countries that are published by State Street, a financial services firm, puts the annual rate at 24.4% and cumulative inflation since the beginning of 2007 at 137%. INDEC says that the current rate is only 9.7%, and that prices have gone up a mere 44% over that period (see chart).

In terms of equity markets, the Merval has fallen about 9% YTD but individual Argentine stocks are down much higher. Of the 15 exchange-listed Argentine ADRs, just two are up this year.

The year-to-date returns of Argentine ADRs:

Click to enlarge

Earlier this year, Argentina announced plans to nationalize  the country’s largest oil-and-gas company YPF S.A. (YPF) angering Spain since Spain-based Repsol YPF SA owned a controlling stake in YPF. Not surprisingly the YPF ADR is down nearly 70% YTD. In another market unfriendly move, a regulatory change earlier this year increased excess capital that dividend-paying financial institutions must hold from 30% to 75%. As a result, banks such as Banco Macro(BMA) were forced to suspend dividend payments.

From a investment perspective, investors can avoid investing in Argentine stocks now since there are too many variables that are difficult to predict starting with political maneuvers of populist President Cristina Kirchner. The risk to reward ratio is not favorable for investors. Until the political and economic situation improves investors can easily find plenty of better opportunities elsewhere including in neighboring Chile, Mexico or Brazil.

Disclosure: Long BMA

Germany’s Most Important Trade Partners in 2011

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The German economy is the largest economy in Europe. Last year the GDP reached 2.5 Trillion Euros. In the third quarter of this year the economy grew by a seasonally adjusted 0.2% relative to the previous quarter. In the third quarter, the total number of employed persons stood at 41.7 million and the provisional household savings ratio reached 8.8%.

In the current European fiscal crisis, Germany has taken the center-stage due its vast economic and financial clout in the European Union. Despite widespread opposition among the local population, Germany reluctantly agreed to bail out Greece but with conditions. Similarly Germany has supported aid to other struggling European countries such as Portugal. One of the reasons for Germany’s support of the bailout packages to these and other European countries is that Europe is Germany’s largest trading partner. The Germany economy would be adversely affected if there are any dramatic crisis in the EU such as the death of the Euro. Hence it is in Germany’s best interest to support the European Union and help poorer countries with financial aid.

The Top 10 Trading Partners of Germany in 2011 are shown in the chart below:

Click to enlarge

Source: De Statis

Some of the key facts about Germany’s trade in 2011 are:

  • As an export-oriented economy, German exports was higher than imports in 2011. Exports totaled EUR 1.5 Trillion while imports amounted to EUR 903 billion.
  • According to the De Statis report, about 71% of exports of goods made in Germany were shipped to European countries. 
  • In addition to being the largest export market for Germany, Europe was also the largest source of imports for Germany accounting for 69% of all German imports.
  • Asia was the 2nd important market for Germany with a share of about 16% followed by North America at 10%.
  • In 2011, the top countries for German exports were France followed by U.S. and the Netherlands.
  • The top three exporters to Germany were the Netherlands, China and France.
  • Greece ranked 38th behind Ukraine for German exports and 49th for German imports. German exports to Greece totaled EUR 5.0 billion and  imports totaled just EUR 1.9 billion.

Related ETF:

iShares MSCI Germany Index Fund (EWG)

For a post on 2010 German trade data click here.

Disclosure: No Positions

The Top 10 Colombian Banks for 2012 Based on Tier 1 Capital Ratio

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The Top 10 Colombian Banks for 2012 Based on Tier 1 Capital Ratio as of December 2011 are shown in the table below:

 

Source: Top Latin American Banks by Country, The Banker

BBVA Colombia is the subsidiary of Spanish banking group Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and Citibank Colombia is the subsidiary of the US banking giant Citigroup (C).

Disclosure: Long BBVA