How to Invest in Stealth Dividends
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- Published on Thursday, 17 May 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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The annual tax fight is rumbling in Washington once again. Last year it destroyed unprepared investors. This year will be worse... except for one tiny segment of the market.
The battle has begun. As bad as last year's fight hurt... it's gonna be a whole lot worse this year.
In a speech on Tuesday, John Boehner threw stones at his political opponents. Washington is months away from reaching its self-imposed credit limit, but the chest poking has already begun.
"When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase," the bronze-toned Speaker said. "This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance."
He's right, of course. Major cuts are the only way out of this mess.
But when we heard these same remarks this time last year, the markets turned sour... and then plunged.
This year's fight will be much worse. Not only is the debt ceiling about to become a red-hot issue, but so is a slew of potential tax hikes.
That spells trouble for investors.
Here's the deal. Mr. Market hates uncertainty. The more the legicritters in Washington debate an arbitrary spending limit and the ideology behind it, the further the Dow will drop.
But Mr. Market hates tax hikes even more.
For the past nine years, Washington has run on the assumption that lower taxes on capital gains and dividends benefit the economy.
But now, it needs more of your money... and is willing to risk the economy to get it.
Come Jan. 1, as I'm sure you've heard, there is a very good chance the tax burden on capital gains and ordinary income will be much higher.
Between now and then, though, there's going to be one heck of a political fight in Washington. And Mr. Market is not going to like it.
I predict a nasty, dangerous market from now through November.
But there is a glimmer of hope.
Let me show you another chart. It's as pretty as the Dairy Princess on prom night.
That's the action from AutoZone (AZO:NYSE) over the past 36 months or so. I show it to you not only because of the straight-line gains, but because Autozone is the undisputed king of share buybacks... the stealth dividend.
The company's management team is not stupid. It knows dividends, while a great way to build wealth, are the ultimate form of double-taxation -- the company first gets taxed on its profits and then Uncle Sam taxes shareholders for their dividend income.
That's why in 1998 (well before Bush's tax cuts), the company embarked on a serious share-buying spree.
Even when Bush slashed tax rates to help eliminate the pain of double-taxation, the company continued buying its owns shares instead of paying a dividend. So far, it's taken nearly $12 billion worth of its own shares off the market.
It's a tactic that has paid off handsomely. And it's one -- thanks to the strong chance we'll see the dividend tax go back to "normal" levels -- we're about to see a whole lot more of.
There is no doubt; companies have plenty of cash... about $1.9 trillion worth.
And there's no doubt in a realm of political and economic uncertainty, companies are not willing to risk the cash through traditional business moves like building new factories or buying competitors.
Today, they are handing the cash to shareholders through dividends. There are some great dividend payers out there right now.
But, unless Congress moves in a way we don't expect, that's going to change come 2013. Dividends won't have the luster they used to.
That's why more companies will follow Autozone's lead. They will still pass the cash on to investors... but they'll use stealth dividends.
Over the next eight months, as the fiscal battle rages in Washington, we will see the trend begin to amplify. As it does, investors will naturally follow the money. Companies with significant share buyback programs -- like Autozone -- will see increased demand for their shares.
And with increased demand comes increases prices.
In the next issue of Unconventional Wealth, I will break down the winners and the losers in this tax battle (dubbed Taxmageddon by the mainstream press) and include a chart detailing eight companies with the best and most appealing share buyback programs.
I am convinced Washington will make this year's fight a bitter one right up to the election in November. If it happens, the overall markets are in trouble... but savvy investors will be handed a grand opportunity.
Get yourself some stealth dividends.
Chart of the Day: The Secret Rise of Secret Deals
By Adam English, Associate Editor, Inside Investing Daily
Mergers and acquisitions have been common for micro- and small-cap businesses for as long as anyone can remember. However, there have been big changes in how the deals are made and reported over the past 15 years...
In 2011, there were roughly 2,900 deals with a total of $115 billion changing hands. That works out to an average of $40 million per deal -- about the same as the peak in 2010.
However, there were about 6,700 merger and acquisition deals with confidential pricing in 2011. That is a 20% increase from 2010. That means over 70% of valuations for deals under $250 million are now confidential. In other words, transparency is waning... fast.
Buyers and sellers in merger and acquisition transactions are not required to disclose values except in public company situations. Smaller businesses rarely meet the criteria set for public disclosure.
There are several advantages that are driving the surge in confidentiality agreements.
When companies disclose the value of a merger or acquisition it allows their competitors to take a detailed look at the deal. It makes it easy for a skilled analyst to extrapolate a lot of information about the companies involved.
Third-party analysts can take a look at any publicly disclosed figures as well. An outsider with no direct interest in the transaction can easily influence how the market reacts to the deal whether they are right or wrong.
For sellers, mergers and acquisitions often provide a detailed look at how they will personally profit from the deal. Few people want the world to know they have a huge windfall coming their way.
Unfortunately, none of these advantages helps small investors. It just goes to show that now, more than ever, it pays to have someone on the inside.
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