The Joplin Globe, Joplin, MO

December 11, 2012

Local companies fear recession from ‘fiscal cliff’; tax hike on dividends could affect utilities

By Andy Ostmeyer
news@joplinglobe.com

CARTHAGE, Mo. — Leggett & Platt Inc. prides itself on the dividends it has consistently paid its investors over the years.

In November, the company announced a fourth-quarter dividend of 29 cents per share, or $1.16 per year, giving it an annual yield at that time of 4.3 percent — which was about double the average of other companies in the S&P 500.

“Leggett & Platt possesses the highest dividend yield among all the S&P 500’s Dividend Aristocrats,” the company said in a statement, “with more than 30 consecutive annual dividend increases.” Dividend Aristocrats are those S&P companies that have followed a policy of increasing dividends every year for at least 20 consecutive years.

“Leggett & Platt has increased its annual dividend for 41 consecutive years, at a 13 percent compound average growth rate,” the company said. “Only 11 members of the S&P 500 have a longer string of consecutive annual dividend increases.”

But in November, the Carthage-based company took an unusual step with regard to dividends, announcing that it would pay its fourth-quarter dividend on Dec. 27 rather than in January, as it normally does.

It said it was moving up the dividend payment “given the significant pending increase of the federal tax rate on dividend income in 2013.”

In other words, it wanted to spare investors — at least for one quarter — the possible higher tax rate if Congress and President Barack Obama are unable to avoid going over the “fiscal cliff.”

The fiscal cliff refers to tax increases and spending cuts that are set to take effect on Jan. 1 unless Congress and the president reach some agreement before then. Among those automatic tax increases is a steep rise in the tax rate for dividend income for many investors.

Dividends are payments companies make to investors, usually every quarter, although they are not required to do so. Investors can take it in the form of a payment or roll it back into stock.



Tax rates

For a decade, the tax rate on those dividends has been capped at 15 percent, regardless of income, and taxpayers in the lowest two of the six income tax brackets — those paying 10 and 15 percent marginal rates — have paid no taxes on dividends at all. Taxpayers in the other four brackets, who might be paying anywhere from 25 to 35 percent of their income in federal taxes, still paid no more than 15 percent on dividend income.

But if that tax rate is allowed to expire at the end of the year, there will be only five tax brackets, with the lowest — those in the 15 percent income tax bracket — facing a 15 percent tax rate on dividend income. Those in the four higher tax brackets would pay the same tax on dividends as on other income, anywhere from 28 to 39.6 percent, depending on their tax bracket.

“If the tax rate on dividend income rises, the after-tax income to many of the individual investors who own the stock clearly is lower,” said Kate Warne, an investment strategist at Edward Jones in St. Louis. “That potentially makes the stock less valuable in the marketplace.”

Some investors, such as those who have IRAs and 401(k) funds, would not be affected because the dividends are automatically rolled back into the stock and not taken as a withdrawal.

Warne said there are fears that some investors could change strategies if the higher tax levels go into effect.

“Nobody knows what is going to happen,” she said.

David DeSonier, senior vice president of strategy and investor relations for Leggett & Platt, said Tuesday that investors who want dividend-paying stocks will most likely still seek them out, regardless of the tax rate.

“We don’t see wholesale abandonment,” he said. “We don’t really think we will see a huge change in our base of investors.”



Utilities

Empire District Electric Co. is another local company known for its dividend yield.

Last month, Empire was named a “Top 10” dividend paying utility stock, according to Dividend Channel, which publishes a weekly “Dividend Rank” report. That report rated the utility’s annual dividend yield at 5.03 percent. The report also cited a strong quarterly dividend history at Empire, which announced a third-quarter dividend last month of 25 cents per share, or $1 per year.

Brad Beecher, president and CEO of Empire, worries that some investors may look elsewhere. The rates right now on capital gains, which are paid on selling stocks, are the same as the rates on dividends, but the maximum rate on capital gains after Jan. 1 would rise from 15 percent to only 20 percent, much lower than the tax rate on dividend income for many investors.

“They (investors) have more incentive to invest in a growth stock than a dividend stock,” Beecher said.

Growth stocks usually do not pay dividends but roll earnings back into the company.

Already, investors have been retreating from utilities, and the utility sector — which is valued for paying dividends — has been losing value faster than the rest of the S&P 500, according to Beecher and others.

“Postelection, the utility segment has gotten hammered,” Beecher said.

Before the election, Empire’s stock was trading between $21 and $22, but since then it has been trading in the range of $19 to $20.

Beecher noted that most of the company’s 750 employees are also investors, and they not only would see higher taxes on their dividend income, but also would pay higher overall taxes.

Dividend tax rates are only part of the concern, however.

Unless Congress and the president reach an agreement before the end of the year, some economists warn of a dire downturn. The Congressional Budget Office calculates that between 3 million and 4 million jobs would be lost, the unemployment rate would begin to climb again to more than 9 percent, stock prices would slide, and the shock to the economy would drive the country back into a recession.

“The recession part of this is as big a worry as anything,” Beecher said.

DeSonier shared Beecher’s concern about a recession, noting that many companies aren’t sure what steps to take with regard to decisions such as hiring and capital investment because the future is murky. They’re waiting to make a move until Congress and the president have laid out a course for the future.



THE ASSOCIATED PRESS contributed to this report.





3.8 percent more



BESIDES THE POTENTIAL INCREASE in the tax rate for dividend income, federal health care legislation also imposes a tax rate of 3.8 percent on all investment income beginning in 2013 for households earning more than $200,000 (individual) or $250,000 (married filing jointly).