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As the election approaches, investors naturally grow nervous with the uncertainty. With Joe Biden’s promises to increase corporate taxes and capital gains taxes, investors wonder about the effect to the stock market as a whole, and whether they should sell ahead of the election.
Because this is a financial website, I will not bring my politics into this article. Instead, I will try to present all known facts and estimates without bias and using some common sense.
For the following breakdown, I will be referencing statistics from two specific sources:
First, let’s summarize the current tax environment. Since President Trump took office in 2016, the Tax Cuts and Jobs Act (TCJA) changed corporate, capital gains, and individual taxes.
Broadly speaking, taxes in all areas were cut across the board, with additional tax credits and deductions applied as well.
Today, the rates most likely to impact investors sit at:
- Corporate Tax Rate = 21%
- Capital gains (long term) = 23.8%
The potential bigger impact to companies in the stock market, which will be reflected in fundamentals and prices, is the corporate tax rate, which will be the focus in this article.
How a Higher Biden Corporate Tax Could Move the Stock Market
Contributor Cameron Smith wrote a great article outlining how the 21.5% of Net Income savings for U.S. companies from the corporate tax rate being cut from 35% to 21% due to the TCJA led to a similar 29.3% S&P 500 gain in the index.
Two possible scenarios stem from the results of the 2020 election:
- Trump retains presidential seat, the 21% TCJA corporate tax rate stays unchanged.
- Biden is elected and passes a bill to increase the corporate tax rate to 28%.
Note: Of course, Trump could also make a surprise change, or an elected Biden could surprise by failing to follow through on his promise, but let’s ignore those for simplicity sake.
For some context on today’s corporate tax rates versus the past, these tax rates are historically low even if Biden changes them to 28%.
As shared by a website called The Balance, corporate taxes were as high as 53% (max rate) during the Nixon administration and have been falling ever since, with the biggest drops happening in 1988 (from 40% to 34%) and from the TJCA (from 35% to 21%).
Though Biden’s 28% corporate taxes would be lower historically, they would still represent a significant increase that would directly impact profitability and free cash flows for all public corporations in the U.S.
An increase from 21% to 28% would be a change of +33%.
For a simple illustration of this impact, take a corporation with $1,000 in profit for the year. The difference between a Trump Corporate Tax and Biden Corporate Tax:
- 21%: Gross = $1,000, Net = $790
- 28%: Gross = $1,000, Net = $720
Right off the bat, a -8.9% haircut (from $790 to $720) is quite substantial. A company who grew revenues at 10% a year under a 28% corporate tax rate would actually see a drop in Net Income in Year 2 from the transition from 21% corporate taxes to 28%.
With -8.9% less in total Net Income for the year, that would represent -8.9% less available for the public company to either reinvest in the business, pay dividends, or buyback shares.
Though a big number, the impact over the long term lessens over time.
The Potential Long Term Impact of Continued High Corporate Taxes
Like I mentioned, the consequences of higher corporate taxes would naturally decrease investor returns in a market priced on fundamentals.
There’s no question of that.
The question is by how much.
It’s impossible to estimate this precisely for every company, as the impact would likely vary quite a bit between industries and companies. But in general, less profits means less reinvestment, which leads to lower revenues for companies across the board.
With less reinvestment of profits, generally, comes less future growth.
So, with the -8.9% less available profits for reinvestment (per year) due to Biden’s higher corporate taxes, it’s reasonable to revise a 10% growth rate into a 9% growth rate (1.0-0.089)= 0.91; (0.91*0.10 = 0.0911) = ~9%
Note: This 10% is nothing special but we are using it for demonstrative purposes, to acquire appropriate percentages.
With the lower future revenue growth baked into a future earnings estimate, doubly compounded by the continued higher 28% rate on Net Income, would result in the following difference between the incumbent 21% corporate tax rate and the proposed 28% corporate tax rate:
From this, we can make a few very general judgments.
Assuming a full 8 years of this proposed corporate tax policy (2 presidential terms), we’d be looking at a -15.3% decrease in Net Income by the time Year 8 arrives (from $1,693.44 to $1,434.65). In other words, the compounding effect of the -9.7% difference in Net Income from the first year of the new corporate tax structure would accrue to eventually reduce future Net Income by -15.3% by year 8.
Not catastrophic, but not insignificant.
Using a compound interest calculator, we can see that the difference in growth of Net Income is the worst during the beginning of the new tax rate change.
For example, in Year 1, Net Income reduces from $790 to $784.80 (a negative CAGR), while the Net Income continues at the hypothetical 10% CAGR with no changes on the 21% corporate tax rate.
As time goes on, the change in CAGR of Net Income improves as Net Income also starts to compound (and grow exponentially), albeit from a smaller base than if it had been unchanged.
By Year 4, the CAGR of Net Income since the corporate tax change would rise to 6.5%, and would settle at around 7.75% CAGR by Year 8 (close enough to around 8% by Year 10).
How Would That Change Today’s Valuations?
With many financial valuation models dependent on the expected growth rate to estimate the value of a stock, the change in growth rate over 10 years (from 8% at the new 28% tax rate, to 10% if left unchanged) would impact stock market valuations in the following way:
- AAPL valuation at EPS growth = 10% –> $83.49
- AAPL valuation at EPS growth = 9% –> $77.66
- AAPL valuation at EPS growth = 8% –> $72.24
In other words, a decrease in the long term growth rate (10 years, 8%) would result in a -13% drop in the perceived valuation of Apple’s ($AAPL) stock today ($72.24 instead of $83.49).
Solely from the increase in the corporate tax rate and the resultant effects to growth, the bottom line impact to the stock market’s valuation at a whole could be a one-time hit of around -13%, excluding any other outside factors and looking at the impact to corporations as a whole.
The implication is that valuations will eventually recover, as they always do, but there would be softness in the growth of earnings—which leads to weakness in stock prices.
Whether this would come in the form of subdued stock price growth over time, or a one-time hit to valuations leading up to the election is anyone’s guess.
Adding Biden’s Proposed Fiscal Policy Impact to Stock Market Prices
Looking just at the corporate tax rate changes doesn’t encompass the entire picture when it comes to Joe Biden’s major policies and the potential impacts to the markets.
Of course raising tax rates should increase government revenues, which if spent by the government efficiently to create economic growth elsewhere should offset some of the loss in Net Income bore by public corporations due to higher taxes.
According to Investopedia, the two potential Presidents have outlined a desire for the following spending plans on infrastructure (meant to spurn the economy):
- Biden: $1.3T in Infrastructure spending over 10 years
- Trump: $2T in a “very big and bold” plan
Putting context into these large numbers again, the U.S. government is projected to spend between $4T- $5T in 2021.
An increase of $130B from Biden ($1.3T divided by 10 years) or $200B from Trump would represent anywhere between a 2.5% – 5%+ increase in total government spending.
Ignore Trump’s spending bill, which Investopedia doubts the feasibility of, and just apply Biden’s proposed infrastructure spending back into the hypothetical impact to the stock market (since that’s what we’re examining anyways).
With Biden, the $130B per year in infrastructure spending would add 2.5% – 3.5% to total government spending. Assuming that this equates to an equal percentage increase to the revenues of the companies in the stock market as a whole (which is probably a stretch, but let’s illustrate it)…
Revising the Biden Corporate Tax Rate Effect with Infrastructure Spending
In effect, the -8.9% decrease in Net Income from increased corporate taxes could be offset by 3% growth from infrastructure spending, bringing the net effect to corporate revenues and profits to somewhere around -6% per year.
Now take that percentage and apply it to the (old) base rate of 10%.
(1.0 – 0.06) = 0.94; (0.94*0.1) = 0.094 = 9.4%
Remember from above that lower Net Income will likely result in lower revenue growth for the future, which will compound into a greater discrepancy compared to if corporate taxes stayed the same—which we defined as a -9.7% difference in Year 1 and a -15.3% difference by Year 8.
With a new 9.4% growth rate of revenues, we can update the table from above like so:
Using these updated inputs, assuming the infrastructure spending spurned great economic activity by a significant amount, the Net Income of a company by Year 8 would be $1,477.31. This would represent a -13% compounded difference, vs the -15.3% we assumed with just the impact of Biden’s corporate tax rate alone.
Reality is probably somewhere closer in the middle, but now we have a good, common sense (and hopefully unbiased) idea of where valuations could lie—and profitability could land—if Biden is elected president and the corporate tax rate is updated to 28%.
Like with all models, projections, and estimations, this solely tries to examine the impact of tax changes on a statistical basis and must therefore assume no other outside forces.
The real world, as we should know, doesn’t fit tightly into a box like this (thankfully).
I think that a reasonable estimation of the impact of a new Biden corporate tax rate to the average investor holding stocks would be reiterated succiently by what I said at the top:
“Not catastrophic, but not insignificant.”
However, over the long term the consensus is that the President of the United States doesn’t really matter all that much to stock market returns.
The stock market follows the economy and business profitability, and short term adjustments to tax codes and regulations are to be expected over the course of long periods of time. In the aggregate, companies learn to grow and adapt to rapidly changing environments, thus creating significant returns to long term shareholders over time.
While an investor is powerless to the next president elect and the resulting short term impact to the markets, the investor has great amounts of control over his or her behavior and habits.
By sticking to long term principles of sound investment management, you greatly increase your chances of compounding your wealth at great rates, regardless of what happens, politically or otherwise.
These long term principles are as old as time, and have worked to provide sound retirements and financial freedom to many individuals over many decades.
Best of all, these principles are timeless, as relevant today as they were 100 years ago. They include:
- Adequate diversification, to mitigate the risk of any one business going bankrupt
- Dollar cost averaging, to smooth out the effects of short term market timing as you enter positions
- Investing for the long term, through ups and downs (and bear and bull markets), in order to completely absorb the benefits of the long term returns of the stock market.
As much as I love digging into the numbers and getting very specific about companies and their financials, I know that it doesn’t take that level of intensity to earn great returns from the stock market, in a safe and reasonable way.
It’s my hope that as you digest all of the uncertainty that political instability creates, you also have the practical solutions in place to secure your financial future into a lasting source of peace and prosperity.
That’s a REAL plan for life, liberty and the pursuit of happiness.
The post Election 2020: Effect of the Proposed Biden Corporate Tax to the Stock Market appeared first on Investing for Beginners 101.
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As investors, there are always opportunities out there. The stock market has actually shown red in the previous two weeks, something investors have not seen in quite a few months! Given the stock market has slightly declined, investment opportunities are out there to help you on your journey to financial freedom. Let’s buckle up and read Lanny’s Dividend Stock Watch List – October 2020 Edition.
Dividend stock watch list
Welcome back to another dividend stock watch list and you can have a sneak pick of the dividend stocks that are on my radar. The stock market has been on an ABSOLUTE tear over the last 30 days and it simply doesn’t make things easy for a dividend investor.
Interest rates are significantly low on your savings, including high yield savings, accounts, as well as money market accounts & funds. In fact, Ally Savings reduced my interest rate to 0.80% back in August. Luckily, I can still say that I am earning 0.80% on my savings account. My lovely message from Ally (ALLY) is below:
It appears that savers and investors are flocking more to the stock market, to capture a dividend yield or even appreciation in the stock market via higher share prices. The IPO’s have taken headlines over, such as Snowflake (SNOW), Airbnb and Robinhood. In addition, whether it’s Tesla’s (TSLA) battery day or Apple’s (AAPL)’s media event, the big tech names are covering the headlines. Further, speaking of Apple, I even asked if Apple’s stock is for dividend investors?
In addition, the Federal reserve continues to make headlines, as they’ve been flushing the stock market with cash. See my last point below, which I also snipped in a picture of an article that sums it up:
- Up to $700 billion in quantitative easing (a fun tool during the financial crisis, that actually, never really stopped).
- Reduced rates to at/near 0.00% for the fed funds rate.
- Purchased ~$4B in FNMA Mortgage Backed Securities.
- Announced Main Street Lending Program to purchase up to $600 Billion of debt from companies employing up to 10,000 workers.
- Announced Municipal Liquidity Facility to purchase up to $500 Billion of debt from states and cities.
- In addition, as you’ll see below, the Fed plans to maintain rates near zero for 3 years.
Therefore, it’s hard imagining an economy without the interjection from the Fed and how much the economy here is relying on them. In addition, the unemployment benefits of $600 extra per week has expired. Now, Donald Trump has an Executive Order out there, requesting a $400 per week additional – $300 paid by the federal government and $100 paid by the state. One would think this could quite a bit of turbulence in the stock market, as we close out the month of August.
As a dividend stock investor, for the first time, I feel a little uncertain of what the future may hold. We continue to save and invest in very conservative dividend stock investments, in smaller purchases. I have written two articles related to the topic of – the Coronavirus Dividend Stock Watch List and Industries that truly thrive during a pandemic.
In addition, given the uncertainty, I continue to make smaller, weekly investments into Vanguard Exchange Traded Funds (ETFs). The specific ETF my wife and I have been loading up on is Vanguard High Dividend Yield (VYM). We are investing $500 per week, to stay invested in the market, during the uncertain times.
In addition, here is a display of what the market did in the last 30 days:
The stock market is down around 2-3% over the last 30 days. It’s amazing seeing that roar up towards the end of August/early September, but now the market is coming back down, slightly. We’ll have to see what the rest of the month has in store, as well as the last quarter of the year! On the road to financial freedom, acquiring assets that produce cash flow or income is the goal! Like I always say, there is always a diamond in the rough. Time to introduce our beloved Dividend Diplomat Stock Screener!
Dividend Diplomat Stock Screener
If you don’t know already, we keep the stock screener metrics to THREE SIMPLE items. They are:
- Price to Earnings Ratio – We look for a price to earnings ratio < than the overall Stock Market.
- Payout Ratio – We aim for a payout ratio between of less than 60%.
- Dividend Growth – We like to see history of dividend growth in a company.
See the video below, for further details and explanation. If you don’t like to watch videos – see our Dividend Diplomat Stock Screener page!
Time to find the answer to… how did the dividend stocks on my watch list grade on the stock screener?
Dividend stock watch list
General Dynamics (GD)
General Dynamics (GD) is a beast int he defense sector. They typically are in the mix with Lockheed Martin (LMT) and do quite a bit of work for the government.
In addition, they are also a beloved dividend aristocrat! You know, those wonderful dividend stocks that have increased their dividend for 25+ years in a row! Time to see what General Dynamics looks like through the Dividend Diplomat Stock Screener:
- Price to Earnings Ratio: At a share price of $142.99, close of 9/18/20, the analysts are projecting $12.03 in earnings per share for 2021. Therefore, the P/E ratio, which helps determine under/over valuation, calculates to 11.89. This compares favorable to the S&P 500, which is trading at 28.5x earnings. Here is evidence for the projected earnings:
- Payout Ratio: General Dynamics pays $4.40 in dividends per year. At a projected earnings of $12.03, the dividend payout ratio is 37%. This is significantly low, lower than our 60% ceiling and GD’s dividend payout ratio almost falls into the perfect sweet spot of 40-60%! The dividend safety is in tact. This shows GD reinvests heavily back into the business, but still pays a decent return out to the shareholders, as well as can allow for room for dividend growth!
- Dividend Growth: Having increased the dividend for 25+ years, the 5 year dividend growth rate is 10%. If you pair that with their dividend yield, which is now 3.08%, that is a great dividend combo, 1-2 punch! The history and growth rate are both stellar!
I currently own almost 30 shares of General Dynamics and wouldn’t mind boosting this position another 5 shares to 35.
Cisco (CSCO) remains on my dividend stock watch list, as they were on there in September. Cisco is a name that you see quite often and you even here us Dividend Diplomats speak about, such as within our YouTube videos and, of course, in my Stocks to Buy in a Post-Pandemic World.
Why do I speak highly of them? Well, during COVID-19, their network capabilities form a VPN standpoint are critical to everyday businesses functioning. In addition, their Cisco Web-ex platform is used across the globe and I know with remote work, I have been apart of many web-ex calls in the last 6+ months.
However, what also is great about Cisco (CSCO) are their dividend stock metrics! Cisco stacks fairly well in the Dividend Diplomat Stock Screener, see below:
- Price to Earnings Ratio: CSCO’s stock price is $39.81, as of September 18, 2020. 22 analysts are projecting $3.33 in earnings per share for 2022. Therefore, dividend the stock price over the earnings per share, equates to a price to earnings ratio of 11.95. Definitely below the S&P 500 and other competitors in the industry, including Microsoft (MSFT) and Zoom Media (ZM).
- Payout Ratio: At $1.44 in dividends per year and dividing that by $3.33, you come to a favorable answer. The dividend payout ratio for CSCO is 43%! Their safety appears sound and they are smack-dab in the middle of the 40%-60% range that I like to see.
- Dividend Growth: Not a dividend aristocrat, yet. However, they are going on 9 consecutive years of dividend growth. Further, they have already increased their dividend in 2020, therefore – that elephant in the room is out of the way! Their 3 year dividend growth rate is almost 9% with an over 12% dividend growth rate for 5 years. I would anticipate 3-5% for the next 1-3 years, again, due to COVID-19.
I own 129 shares of Cisco (CSCO). However, I could see this position swelling to 150 shares at or under these price levels. Obviously, I prefer lower!
This wouldn’t be a dividend stock watch list without a Top 5 Foundation Dividend stock, it just wouldn’t be right. AT&T (T) has been a dividend stock that has been treated more like a fixed income investment. Their stock price for AT&T (T) has virtually remained unchanged, between $28 and $31 per share.
AT&T (T) is gaining momentum within the streaming segment, with their new AT&T TV service. Further, sports are back, so their networks are going to be performing well. Lastly, 5G is coming and AT&T stands to capitalize with their telecommunications segment.
Related: Top 5 Foundation Dividend Stocks
It only makes sense to also run AT&T through our Dividend Diplomats Stock Screener. See the dividend stock metric results below:
- Price to Earnings Ratio: Analysts are projecting $3.22 in earnings per share, on a go forward basis. At a stock price of $28.93, this equates to a significantly low 9 price to earnings ratio. Wow, is all I have to say! Definitely signs of undervaluation.
- Payout Ratio: Given AT&T (T) pays out $2.08 in dividends, you take that over $3.22. This equates to a dividend payout ratio of 65%. Slightly higher than the 60% threshold we like to see, but AT&T is typically around this payout mark.
- Dividend Growth: They are a dividend aristocrat baby! They have 36 years of consistent dividend increases, albeit with a dividend growth rate of 2%. They aren’t here to blow your socks off with dividend increases, that’s for sure.
Dividend Stock Watch List Conclusion
All three dividend stocks my wife and I hold in our portfolio. In addition, we have a decent position in all 3, but they are showing signs of undervaluation. We have three completely different industries here with Defense, Technology/IT and Telecommunications. I would argue that each one is used in our every day lives. Of course, prior to making any purchase, I definitely will make sure to run them through the Dividend Diplomat Stock Screener once more.
I could see myself adding all three, but would arguably love to see lower stock prices! The road to financial freedom seems far away, but I know I need to make investment decisions and continue to step along the path. Not one specifically sticks out in my mind as a clear stock winner here, as all three show great metrics. I would argue Cisco, then General Dynamics and followed by AT&T, if I were to order them.
As you have noticed, I have trickled many articles on this page. The goal is to educate new dividend investors out there, or to sharpen the terminology for current dividend investors. As always, stick to your investment strategy and dividend stocks will be there. What do you think of these stocks above? Thank you, good luck and happy investing everyone!
The post Dividend Stock Watch List: Lanny’s October 2020 Edition appeared first on Dividend Diplomats.
FCA tackles the insurance penalty – at last!
The Financial Conduct Authority (FCA) has announced today that it will reform home and motor insurance, focussing particularly on the current “loyalty penalty” that punishes existing loyal clients’ premiums and favours new clients.
The FCA found in 2018 that some 6 million policyholders were paying high or very high margins over and above an average premium. Had they have paid the average for their risk, they would have saved £1.2 billion!
The FCA has published a 31-page report on the insurance market and finally (two years later!) announced a consultation on the following:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term.
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
- Making it simpler to stop automatic renewal across all general insurance products.
“The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel.”, says the regulator’s announcement today.
If the proposal goes ahead it is estimated that £3.7 billion would be saved by insurance customers over 10 years. Methinks the insurance companies won’t like these proposals!
Loyalty Super Complaint
The FCA’s action originates in September 2018, when the Citizen’s Advice Bureau launched a “Super Complaint” calling on the regulator to look into how consumers are being penalised for loyalty in 5 key sectors. It requested an outline from the CMA on what action would be taken to resolve the problems.
FCA Consultation on insurance prices
The FCA’s consultation is open until 21 January 2021, to be followed by analysis of feedback and a Policy Statement, with new rules due later that year. We’ve all known that these practices have been going on for years and the Super Complaint was made two years ago. It beggars belief that it will be three years from this complaint before something is done.
FCA dragging its feet
In a statement made in September 2018 the FCA said
“In the FCA’s 2018/2019 Business Plan we announced that we were looking at the pricing practices of general insurance firms. As part of that work we will launch a market study looking at how general insurance firms charge their customers for home and motor insurance. The terms of reference for this market study will be published in a few weeks’ time.”
So, why has it taken so long?
In the meantime here are the measures you can take to ensure that you are not losing your share of the 1.2 billion that insurance companies are overcharging their loyal customers!
See How to save money on insurance and beat the tactics used to make you renew a story of how to get round the company wanting to make you phone to cancel a renewal…
The post Regulator slowly, finally makes moves to resolve major insurance market issues first appeared on https://www.thecomplainingcow.co.uk.
What investing tips should you know?
No other part of the economy is designed for success quite like the stock market. So, what’s keeping you from being a member of the Investing Class? Setting up an investment account is easy, and you can get started today by using our investing tips!
Hear 5 simple investing tips for entering the stock market
Make money now with these investing tips
On this episode of Queer Money®, we’re sharing our first five tips to super-simple investing. We explain how to open a retirement or brokerage account online and set up automatic deposits funneled directly from your paycheck.
We go on to offer advice on investing in low-cost exchange-traded funds, or ETFs, discussing the benefits of having a diverse portfolio that includes different asset classes and variables. Listen in for insight on riding out the ups and downs in the market and learn how YOU can join the investing class ASAP.
Topics covered on investing tips
1. Open an investing account online
2. Set automatic payments to your investing account
- Small, reoccurring steps = best gains
- Use direct deposit or electronic funds transfer
3. Keep it stupid-simple by investing in low-cost ETFs
- Basket of stocks or bonds that trade through the day
- Mirror of a stock index or investment type (e.g.: tech)
4. Diversify your investments for consistent growth
- Throughout different asset classes and variables
- Don’t feel pressure to act on hot stock tip
5. Open an emergency savings account
- Don’t have to worry about ups and downs in the market
- Ride out drops and participate in upswings
Resources for investing
- Super Simple Investing Guide
- The Debt Lasso Method
- National LGBT Chamber of Commerce New York
- M1 Finance
- Traditional IRA vs. Roth IRA on Queer Money EP194
- Debt Free Guys on Facebook
- Debt Free Guys on Twitter
- Queer Money Facebook Group
- Queer Money on Instagram
- Subscribe on iTunes
- Email [email protected]