Tax Plans – Part 2

Much has transpired over the past week in regards to tax reform.  With the Alabama Senatorial special election now being too close to call, Congress is kicking into high gear to try to get it passed while the Republicans hold a slim majority in the Senate.  This past week saw the House passing their version with no debate although appearances were that many were unaware of the full impact.  Case in point is the CNBC interview with Diane Black (R-TN) where she had the wrong definition of carried interest (she thought it was applicable to car dealers not hedge funds).

If it passes the Senate in something close to its current form, the result will be a reduction in the number of people qualifying for tax deduction itemization from the current 29% to an estimated 6%.  This is the “gotcha” for many filers including myself.  The proposed increase in the standard deduction is large enough to wipe out itemization yet too small to prevent an overall tax increase.  The only viable course of action (for me) is to front load deductions into the current tax year and hope it is not a retroactive change.  I’ve eliminated one alternative from consideration (establishing a corporation) as it would only be a wash in my current bracket and would choose accelerate my 2018 income up to the 25% tax level while reducing subsequent years to fall below the 0% rate.

This plan also has some potential ‘unintended consequences’ which may impact both Trump’s agenda as well as 2018 (and beyond) investment strategies.  Last week I identified home builders as a potential casualty, this week I’ll present a few more that I’m looking at .

Chained CPI

This will impact retirees first and wage earners later.  Essentially this modifies cost of living increases to a lesser increase than regular CPI.  Social Security and Veterans benefits will have lower increases than before reducing disposable income.  Wage earners will see tax brackets expand more slowly potentially (eventually) putting them in a higher bracket faster than the current structure.  End result is (my opinion) a positive for Staples and Utilities with Discretionary taking it on the chin.

Municipal Bonds

The plan would eliminate – or curtail – issuance of private activity bonds (hospitals, nonprofit colleges and universities, and airports) or Municipal Bonds for stadiums.  These types of bonds are often used for rehabilitating cities – think infrastructure.  If one tool is eliminated what is the chance of Trump’s Public/Private partnerships getting off the ground?  I see this as a negative for some Industrials.

General Electric

In the midst of GE’s dividend cut and restructuring I had to hit the pause button.  Their game plan going forward is to focus on three segments; Aviation, Healthcare and Power.  All fine and well – at least it’s a plan.  The remaining business lines will be sold or spun off – which is why I remain interested (although prior spins haven’t been shareholder friendly).  Now the tax plan injects an additional wildcard.  The Power division is the most troubled.  The Renewable Energy segment may be a spin candidate especially as the tax plan targets the Wind Energy production tax creditRetroactively.  Talk about throwing a monkey wrench into the thought process.


With all the unknowns, I believe my 2018 strategy will be to prioritize growth over yield.  The rationale being to delay taxable events as much as possible.  Next year is certainly on tap to be full of uncertainty and  surprises.

Are you considering alterations to your strategy?

 

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September 2017 Update

This month for my portfolio was choppy to say the least.  Impacts were the start of calculating hurricane damage, data breaches, fears of a primary tenants’ possible bond default, continuing geopolitical fears and a strengthening of the US dollar at month end (again). With a portfolio currently weighted 15.35% pure international and a little overweight towards Texas it’s not too surprising the S&P index outperformed by increasing 1.93% versus my 0.36% increase.  For the year I’m still ahead by 2.9%.  On the other hand, dividends received set a new monthly record.

Headlines impacting my portfolio (bold are owned):

  • 9/7 – SQ to apply for UT banking license as an industrial loan co.
  • 9/7 – BANF acquires First Wagoner Corp and First Chandler Corp
  • 9/7 – EFX announced massive dB hack
  • 9/11 – UNH makes formal offer to acquire BANMEDICA.SN
  • 9/11 – Cdn approval for POT/AGU merger received. awaiting  US, India and China.
  • 9/14 – MMP forms JV w/ VLO for marine termimal in Pasadena, TX
  • 9/21 – GBL (Mario Gabelli) increases stake to 7.74% in BATRA
  • 9/25 – GE sells industrial solutions unit to ABB
  • 9/28 – DGX acquires Shiel Medical Laboratories from FMS
  • 9/28 – IVZ buys Guggenheim Ptnrs ETF business
  • 9/29 – AIG sheds SIFI designation

Portfolio Updates:

  • added to FFIC prior to ex-div on market weakness (N. Korea)
  • added to NWFL (stock split)
  • added to AROW (stock dividend)
  • added to HOMB and lost SGBK (merger)

Dividends:

  • September delivered an increase of 47.56% Y/Y with the about half of the increase being attributable dividend increases and the other half purchases with an assist from a merger premium.
  • September delivered an increase of 16.87% over last quarter (June).  Semi-annual payers, a purchase and dividend increases being the reasons.
  • Declared dividend increases averaged 10.98% with 65.54% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 92.61% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in late October.

Spinoffs:

Spirit Realty Capital (SRC) has been announced.

Mergers:

AGU/POT (Nutrien) remains pending, SGBK/HOMB completed September 26th.

Summary

With the primary goal of exceeding last year’s dividends in sight, my focus turns to developing a strategy for 2018 – which will likely hinge on the degree of success – if any – to be expected in Year 2 of this administration.  Otherwise I’ll probably continue with the current adding to the underweight holdings unless news erupts.

Harvey

Hurricane

Mother Nature certainly is a beast at times.  Watching her ongoing treachery on the television is heartbreaking to say the least.  Looking out the window, I see sporadic rain – which will continue for a few days – but nothing of the magnitude being experienced just a couple hundred miles away.

As my mind wanders a little due to the same images being replayed over and over, I can’t help but thinking of the economic impact of Harvey.  Being resident in Texas, my portfolio has a little bias towards my home state.  In a similar vein, which companies stand to lose – or gain – from this tragedy?  I figured I’d lay out my thoughts – which probably are incomplete – as a basis for determining whether my portfolio can weather (pun intended) a storm of this severity.

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Insider Dealing?

The news cycle appears to be churning ever faster.  Whether as a reaction to events, an attempt to manage the narrative or obscure the message is a debate that will occur for some time with the real answer becoming apparent in the hindsight of history.  Not to minimize the Charlottesville tragedy or the headline grabbing Bannon ouster, but these stories are playing out in several flavors depending on the source.  As one who attempts to discern the impact of issues on my investments, two (possible) financial headlines crossed my desk amid the other events that intrigued me.

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Unbundled PRI Q1

Yes, I know you want me to get to the end of year results and 2016 goals already.  Those will be my next two posts.  Promise.

Meanwhile, it’s time for a review of the first quarter of my Primerica analysis.  Here’s my initial write up.  On Christmas Eve, I used my remaining free cash to purchase this group of companies.  I did make a few changes to the original selection:

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