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Why Congress Is Targeting These Dividend Favorites

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By Dan Caplinger, The Motley Fool

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Investors have flooded into high-yielding dividend stocks to get more income from their portfolios. But now, Congress is looking at potentially taking a bigger piece of the profits that popular high-yielding real estate investment trusts earn, as a Wall Street Journal report explains how the House Ways and Means Committee is looking at potentially revoking a big tax advantage that they’ve enjoyed for years. If Congress follows through, investors would likely be left paying the price.

Image source: Wikimedia Commons.

What are REITs?
Real estate investment trusts were almost unknown 15 years ago. But between the housing boom and the parallel rise in commercial real estate that largely continued until the 2008 financial crisis hit, REITs have attracted a substantial following among income-seeking investors.

The benefit that REITs enjoy over most companies is that REITs don’t have to pay corporate taxes. Instead, they’re required to pay at least 90% of their taxable income to their shareholders, who then have to pay individual income tax on what they receive. That may sound onerous, but the net result is to avoid the double taxation that most corporations face, paying tax at the corporate level and still leaving investors to pay taxes on their dividends.

Because of the requirement to pay out the vast majority of their income, REITs often have extremely high dividend payouts. Mortgage REITs ARMOUR Residential and Chimera Investment use leveraged strategies to produce yields well in excess of 10%, while Omega Healthcare and Senior Housing Properties Trust , which specialize in long-term care facilities and other properties catering to older residents, both have yields between 5% and 6%.

Why are REITs under fire?
Congress has been looking at a number of potential revenue-raising measures lately, so provisions that involve corporate tax breaks are a natural place to look. Moreover, many companies have been looking to take advantage of REIT status for all or a part of their operations, leading to concerns that the REIT format is being abused. Forest-products and timber giant Weyerhaeuser converted itself to a REIT back in 2010, using its extensive timberland holdings as justification for the move. But recently, even casino operator Penn National Gaming has looked into putting its real-property holdings into a separate REIT as a possible tax-savings mechanism, with the company having gained the support of the Pennsylvania Gaming Control Board last week to take the step toward REIT status.

One reason REITs aren’t in as much danger as other beneficiaries of tax breaks is that the revenue impact from revoking REIT status isn’t as large as one might think. Currently, REIT investors pay ordinary tax rates on distributions, which can be as much as 20 percentage points higher than the rates that would apply to dividends if the favorable REIT tax status were revoked. The federal government would collect corporate taxes from the former REITs directly, but the net

Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

Will Sequestration Sink General Dynamics' Aegis Destroyer?

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By Katie Spence, The Motley Fool

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Sequestration’s in full swing, and it’s putting a kink in the Navy’s ship-buying plans. Before sequestration took effect, the Navy signed a multi-year procurement contract, which saved money by buying ships in bulk. Now, however, the defense budget has been cut, and that contract’s in jeopardy. This is bad news for defense contractors on the DDG 51 Aegis Destroyer contract and could also be bad news for investors. Here’s what you need to know.

U.S. Navy photo by Paul Farley. Public domain, via Wikimedia Commons. 

Who builds what
Both General Dynamics‘ Bath Iron Works shipbuilding company and Huntington Ingalls Industries‘ Ingalls Shipbuilding build the DDG 51 Aegis Destroyer, with the Navy typically buying ships from each builder.

In a move to save money, the Navy signed a 30-year shipbuilding plan that saw the purchase of 10 Aegis Destroyers for the price of nine. It also increased the Navy’s shipbuilding budget from $15 billion to almost $19 billion annually. Now, Rep. Randy Forbes (R-Va.), chairman of the House Armed Services Committee, has expressed grave concerns about funding the 30-year plan and has asked the Navy for “a scintilla of evidence” that it can be done.  

One of the reasons the Navy’s costs are so astronomical is that the service also has to replace the Ohio, a nuclear-capable submarine dating to the 1980s. Adm. Jonathan Greenert, chief of Naval operations, has stated, “People ask me what is my No. 1 program of concern, and I will tell you it’s the Ohio replacement program.” Not only is the Ohio outdated, but the replacement program will also provide 70% of the United States‘ nuclear deterrent capabilities.  

With the price of the new subs and the need for new ships, the Navy is seeing its costs escalating, which of course conflicts with the 10-year, $500 billion cut to defense spending under sequestration . 

Will the Navy remain mission-capable?
Ships aren’t the only area where the Navy is seeing cuts; the service was also planning on purchasing one P-8A maritime surveillance plane from Boeing , one E-2D Hawkeye battle management aircraft and two unmanned Fire Scout helicopters from Northrop Grumman , and one F-35C carrier fighter from Lockheed Martin — all of which face being cut.  

Clearly, this is all bad news for defense contractors. It’s also bad news for the Navy, as it relies on these systems to remain mission-ready.

What now?
What’ll happen to the Aegis Destroyer contract remains to be seen, but it’s not looking great. If it does get cut, General Dynamics and Huntington Ingalls could see their stocks suffer. On the other hand, that might end up being a great time to load up on defense stocks at a discounted rate. Yes, sequestration is hurting defense, and contracts are being cut, but as I’ve said before, defense contractors are essential to the military. Consequently, while defense contractors may be hampered in the short term, in

Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

When Will Amazon Start Making Real Money?

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By Steve Symington, The Motley Fool

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Sometimes I wonder just how much hair has been lost trying to predict exactly how Amazon.com  stock will react following quarterly earnings reports.

Last quarter, for instance, Amazon stock hit an all-time high in the days after the company not only missed analyst estimates for both revenue and earnings per share, but also lowered its guidance.

This time around, after what seemed like perfectly decent results, shares of Amazon dropped like a sedated 800-pound e-commerce gorilla before finally closing down more than 7%.

 

Image source: Wikimedia Commons.

So were the results really that bad? Let’s dive into the numbers to find out. 

For the first quarter, net sales rose a whopping 22% to $16.07 billion, falling just short of analysts’ expectations of $16.15 billion. However, note that Amazon’s reported revenue also included an unfavorable $302 million impact from year-over-year changes in foreign exchange rates and so otherwise would have exceeded estimates.

Operating income decreased 6% to $181 million, including a $12 million hit from foreign exchange rates, and net income fell 37% to $82 million in the first quarter, or $0.18 per diluted share. Curiously enough, that number nearly doubled analysts’ estimates, which called for net earnings of $0.10 per share. 

So why did Amazon stock get punished? Look no further than management’s second-quarter 2013 revenue guidance of between $14.5 billion and $16.2 billion, which amounts to year-over-year growth somewhere in the range of 13% to 26%. In the end, even if management is conservative, the middle of their range sparked short-term fears of decelerating growth given analysts’ average revenue estimates of $15.9 billion next quarter.

The multibillion-dollar question
Even so, it’s becoming increasingly evident that one question remains on investors’ minds: When will Amazon start making the big bucks?

After all, while its gross margin did rise to an all-time high of 26.6% last quarter, both its operating and net margin remained razor thin at 1.1% and 0.5%, respectively. As fellow fool Evan Niu pointed out recently, Amazon’s historical bottom line looks downright silly next to other ridiculously profitable tech companies like Apple , which just last week told investors it earned $9.5 billion (with a “b”) on sales of $43.6 billion.

If Amazon were as profitable as Cupertino, then, simple arithmetic tells us it would have earned around $3.5 billion on last quarter’s revenue instead of that measly $82 million.

To Amazon’s credit, it still generates plenty of cash from operations, which itself increased 39% to $4.25 billion for the past 12 months. In addition, had Amazon not spent $1.4 billion on property and corporate office space in Seattle last quarter, free cash flow would have come in at around $1.58 billion.

So why do investors put up with it?

The wonders of properly managed expectations
In the end, this is exactly how Amazon CEO Jeff Bezos told shareholders he would run the company when it went public in 1997. In fact, in Bezos’ first letter to Amazon shareholders, he wrote the following

Source: FULL ARTICLE at DailyFinance

Business, Finance, Occupation & Industry

The $32 Billion Bank Heist You're Paying For

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By Dan Caplinger, The Motley Fool

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Bank robberies conjure up images of famous criminals like Jesse James or Bonnie and Clyde. But nowadays, many consumer groups are accusing banks of having turned the tables on their customers, taking billions of dollars from their accounts every single year. As appalling as that sounds, it’s perfectly legal, and it all happens because so many customers voluntarily do something they could easily avoid: They overdraft their checking accounts.

Bank robbers Bonnie Parker and Clyde Barrow, also known as Bonnie and Clyde. Source: Library of Congress via Wikimedia Commons.

The appalling statistics on bank overdrafts
The amount of money involved in bank overdraft fees makes the worst bank heists in history seem like pocket change by comparison. According to a study by Moebs Services, bank customers paid $32 billion in 2012 on overdraft fees. That’s actually down from $37 billion in 2009, but it’s up slightly from 2011.

Millions of customers pay overdraft fees, with Moebs estimating that 38 million checking accounts — more than a quarter of the total number of such accounts in the nation — frequently incur overdraft fees. With a typical charge for overdrafts coming in at around $30 for banks and $27 for credit unions, incurring those fees multiple times can quickly add up to a huge burden on customers.

Payday lenders: the better alternative?
Perhaps the most surprising thing about the study is that payday lenders may actually be a lower-cost source for people short on cash than banks. As much as payday loan operators Cash America and Fast Cash Financial and pawn-shop giant EZCorp have been criticized for their high fees, the Moebs study found that typical fees at payday lenders were just $16 — well below the typical overdraft charge.

When will the fees end?
Last year, the Consumer Financial Protection Bureau took on high overdraft fees with an investigation into whether certain bank practices improperly increased the amount customers were charged. Among the areas the CFPB examined were transaction-reordering guidelines that often lead to multiple overdraft charges, as well as misleading marketing materials.

CFPB Director Richard Cordray. Source: CFPB.

If the CFPB is successful in limiting overdraft fees, the impact could be huge. Already, Bank of America , Citigroup , and other banks have ended the practice of resequencing transactions in a way that could increase fees. Yet as Fool contributor Amanda Alix noted at the time, further limits could cost banks 3% to 4% of their earnings, with B of A’s losses potentially amounting to $480 million. Until the CFPB plugs all the potential loopholes, high-cost overdrafts will continue to happen.

Protect yourself
In the end, as ridiculously simple as it sounds, the only way you can stop banks from taking your hard-earned money is to stop overdrafting your checking account. Given how common overdrafts are, though, millions of Americans don’t appear likely to …read more

Source: FULL ARTICLE at DailyFinance