Archive for 2012

The Rich Will Not Abandon Dividend Stocks

Friday, December 7th, 2012

WHO ARE THE RICH?  First an apology for using the term “rich”.  Because this is about pending tax policy, we are using the Washington D.C. working definition of rich.  You know — the movement that began with soak Warren Buffet and Bill Gates, because billionaires don’t pay enough and actually want to pay more — the soak the billionaires movement that quietly became the soak the millionaires movement, that morphed into soak the rich, who we find are those couples who make $250,000 per year or more (and singles who make $200,000 per year or more).

No doubt, $250,000 goes a long way for lifestyle in some towns, but barely keeps a family above water in NYC and some other places.  Anyway, $250,000 is the threshold for higher taxes being discussed as part of the fiscal cliff resolution, so we’ll go with that for the purposes of this letter.

Actually the argument of soak the rich, got changed to soak the top 1%, then the top 2% and recently in one speech the top 3%.  We think it is more reasonable to talk about percentile tiers than rich versus middle versus poor, but unfortunately for everybody, there is no way out of all our financial problems without everybody paying more one way or the other.  Washington surely has more recent data, but based on the published 2009 IRS tax statistics, those tax filers with adjusted gross income of $250,000 or more were 1.78% of all filers, and 3.06% of filers who owed any taxes.

[note: we are working off of Adjusted Gross Income here, and the law is proposed based on Taxable Income which is not the same number, so the tax impact in this discussion is somewhat different, but this data is probably good enough to study the general question; and if lots of deductions are capped or eliminated, AGI will begin to approach the taxable amount.]

If you should care to inspect the IRS tax statistics for 2009, they are available at this link.

We have the dilemma that the United States has increasingly tried to create a European style entitlements state (and playing the world’s policeman via a giant military), while at the same time taxing like a state where everyone has personal responsibility for their own outcomes.  As anyone who looks at Europe will see, it is not just the rich who pay a lot for universal benefits.

It is also a practical fact that corporations (and therefore the owners of private and public companies) don’t ultimately pay taxes.  When their costs go up (whether through taxes, labor costs, or other input costs), they eventually pass them through to the broad population in the form of higher prices for goods and services — in which case everybody pays.


Those who fear that dividend stocks will collapse due to the scheduled increase of dividend taxes to the ordinary rate are most likely wrong, because the impact is far less on the rich (as defined above) and far less overall than the surface numbers suggest.

FIRST, only about 1/2 of all dividends are earned by individual taxpayers, as this graphic from Fidelity for 2010 shows:

SECOND, about only 60% of all dividends earned by individuals were earned by those in the rich category, as this table of extracted data from the 2009 IRS tax statistics shows:

(click image to enlarge)

THIRD, when you combine the 50% of stocks owned by individuals with the approximate 60% of dividends in individual tax returns that are earned buy the rich, you see that about 30% of overall dividends are earned by the rich (assuming that individual accounts, tax-deferred, and tax-exempt accounts, and non-US accounts have an approximately equal mix of dividend and non-dividend stocks,

That means that 70% of those individual accounts and tax-deferred and tax-exempt accounts, and non-US holders of dividend stocks are not scheduled to have any reduction in net cash flow from dividends as a result of the 2013 US tax rates for dividends.  They have no direct tax related reasons to move out of dividend stocks.

FOURTH, dividend income is only about 3.9% of the adjusted gross income of the $250,000+ earners who garner 30% of all dividend income, as shown in this chart which compares the percentage of income for the rich that comes from each source that is at least 1/2% of their adjusted gross income.

The rich got about 50% of their income from wages and salaries, about 23% from partnerships and sub-S corporations, 3.9% from dividends, 3.5% from taxable interest and 2.0% from tax-exempt municipal bond interest in 2009.

In 2009, capital gains were negligible, and are larger these days, but capital gains are less reliable than dividends.  The rich are not likely to decide to go solely for capital gains as a result of tax rate changes  They will want some mix of stable income and gain potential.  They can’t go substantially to bonds right now, because rates are very low and there is no income growth potential.

Muni bonds not only have credit risk which is rising, but tax exemption itself is potentially on the chopping block.  The Simpson-Bowles report recommended grandfathering old muni bonds and eliminating all tax exemption for new muni bonds.  The President has proposed limiting the tax benefit of muni bonds to 28% (in an environment where the full tax would be 43.4% (39.6% + 3.8% Medicare surcharge tax on all investment income).

FIFTH, the additional 24.6 points of tax on dividend income will be only somewhat less than 1% of their total adjusted gross income that is taken away versus this who are not rich.  That is  not enough to cause the rich to walk-away from dividends. (that is 24.6% of the 3.92% that came from qualified dividends in 2009) — the rich also got 0.88% of their income from non-qualified dividends in 2009, but they were subject to ordinary rates at that time.

We didn’t include the 3.8% Medicare tax as an additional burden on dividend income, because it is also applicable to every other sort of investment income; including interest, dividends, capital gains both long and short, rents, and royalties. There is simply no place to hide from that.


We don’t want to pay more taxes, and most likely you don’t want to either; and the extra bite out of dividend income is unpleasant. However, in light of these facts, we don’t see the market overall reacting as drastically to the change in dividend tax rates as the 15% to 43.8% (basically 3X) change to the top rate suggests on the surface.

A minority of all dividend income is earned by the rich.  A small portion the total income of the rich comes from dividends.  Dividends are less than 1/2 of the investment income of the rich.  And, the rich don’t have many other places to go to find yield that provides the combinations of income growth, liquidity and relative stability and safety as high quality, brand dominant companies with good dividend coverage and long histories of paying and increasing dividends.

What do you think?

Q3 Stoxx 600 vs S&P 500 EPS Growth

Tuesday, December 4th, 2012

This chart is from Thomson Reutuer “Alpha Now” (12/04/2012):

80% Price Probability for S&P 500 Next 3 Months

Wednesday, November 28th, 2012

Mobile OS Market Share 2009 Q3 vs 2012 Q3

Thursday, November 15th, 2012

Price vs Target Price Evolution for GOOG, AAPL & MSFT

Saturday, November 10th, 2012

The three key players in the competition to develop a mobile ecosystem are Apple, Microsoft and Google.

“Ecosystem” generally refers to a one company source for interoperable, mobile phones, tablets, laptop or desktop computers, operating systems, app stores, and cloud storage.

Google and Microsoft are imitating Apple’s success with an ecosystem, but each has their own twist.  Google is moving toward wearable computing and Microsoft is moving toward mobile productivity and corporate connectivity.

We think Google could become the next runaway success with the introduction of wearable mobile computing through Google Glass in 2014-2015.  When and how they will have calling connections through telecomm carriers is unclear at this point.  However, wearable mobile devices and freeing of the hands as is expected to eventually become the case with Google Glass would be a disruptive change that would challenge Apple’s domain.

Apple is the top dog now, and is growing well, with tremendous opportunity in China if they can get onto the China Mobile platform.

Microsoft, with the introduction of their Surface Pro tablets in 2013 will have the edge for those who want full productivity capability in a tablet for word processing and spreadsheets with a fold out keyboard.

This chart shows the evolution of the price of GOOG, AAPL and MSFT versus the average street analyst 1-year target price over the past 18 months.  The data is as of 2012-11-09, is from using data from ThomsonReuters.

Target prices for GOOG are rising, falling for AAPL and flat for MSFT.

For GOOG there are 42 analysts with a $798 average target price, which is about 20% above the current price (yield = 0%, EV/EBIDTA =11.43, PEG = 1.24).

For AAPL there are 57 analysts with a $764 average target price, which is about 40% above the current price (yield = 2.00%, EV/EBITDA = 8.30, PEG = 0.50).

For MSFT there are 38 analysts with a $35.40 average target price, which is about 23% above the current price (yield = 3.20%, EV/EBITDA = 6.56, PEG = 1.11).

The current ThomsonReuters StarMine analyst ratings for the three companies (rating scale 0-10, worst to best), and the S&P Stars Rating for year ahead price performance  (1-5 worst to best) / Fair Value Rating (1-5 worst to best) are as follows:

  • GOOG:  2.9;  3/5
  • AAPL: 7.4;  4/4
  • MSFT: 8.3;  5/5

The Beta for the three varies with Microsoft lowest and Apple highest:

  • GOOG: 1.09
  • AAPL: 1.22
  • MSFT: 1.01

The Put/Call Ratio shows the most concern about GOOG and the least about MSFT.  The 1-day  /  30-day Put/Call Ratios (as of Nov. 9, 2012) were:

  • GOOG: 1.2/1.0
  • AAPL: 0.8/0.6
  • MSFT: 0.5/0.6

The Put/Call Ratio for GOOG and APPL were higher than the 30-day average last Friday, while the ratio for MSFT was lower.

Just How Large Is Apple’s Growth Challenge

Saturday, November 10th, 2012

Apple (AAPL) faces a monumental continuing growth challenge. It is so large that in order to continue growing at its recent pace, it has to create revenue and market-cap each year equal to the entire revenue or market-cap of major companies.

This chart from shows that Apple increased its market-cap by nearly 38% in the last 12 months, and its revenue by about 22%.

(click to enlarge)

In light of that growth data, let’s see, denominated in companies, what would be entailed for Apple to increase its market-cap and revenue by 20% to 25% in the next 12 months.

At about $515 billion in market-cap and about $157 billion in revenue, they would need to increase market-cap by $103 billion to about $129 billion; and increase revenue by $31 billion to about $39 billion.

That means they would have to add market-cap about the size of one of these companies in just 1 year (and do better than that in each subsequent year):

  • Amazon ($103 B)
  • Bank of America ($102 B)
  • Intel ($104 B)
  • Unilever ($102 B)

Alternatively, that means they would have to add revenue about the size of one of these companies in just 1 year (and do better than that in each subsequent year):

  • Aetna ($35 B)
  • Allstate ($33 B)
  • American Express ($29 B)
  • DuPont ($39 B)
  • General Dynamics ($33 B)
  • Goldman Sachs ($31 B)
  • Honeywell ($38 B)
  • Oracle ($37 B)
  • Plains All American ($37 B)

They may well do it, but when the size of the growth hurdle is denominated in the named other large company equivalents, it is simply amazing.

They need to grow incrementally by amounts annually that are equal to or greater than the total lifetime accomplishments of major corporations.

It puts a different lens on the growth challenge, and gives rise to reasonable questions about the limits to growth — how much they can continue to add year upon year.