The Zacks Analyst Blog Highlights: Exxon, Apple, E-Trade, Schwab and U.S. Steel

Zacks

For Immediate Release

Chicago, IL – August 16, 2011 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Exxon (NYSE:XOM - News), Apple (NasdaqGS:AAPL - News) E-Trade (NasdaqGS:ETFC - News) Schwab (NYSE:SCHW - News) and U.S. Steel Corp. (NYSE:X - News).

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Here are highlights from Monday’s Analyst Blog:

End the Corporate Income Tax!

Currently, the U.S. has a very high level of corporate tax rates. However, the tax code is so riddled with loopholes, preferences and exclusions, that most companies actually pay very low effective tax rates. Corporate taxes have been declining as both a share of GDP and of federal revenues for years now (see graph below). There have been many calls to get rid of many of the loopholes and bring down rates.

I have a better idea: Why don’t we just get rid of the corporate income tax altogether? However, if we do that, we will have to make some other very significant changes to the tax code, but ones that I think would greatly simplify the tax code and greatly reduce the role of government in “picking winners and losers. 

Ultimately, corporations are not real people (regardless of what the Supreme Court says about their ability to give money to campaigns). If Exxon (NYSE:XOM - News) or Apple (NasdaqGS:AAPL - News) are taxed, ultimately that money comes out of some "real" person’s (y'know, the type of person with a heartbeat) pocket.

Unfortunately it is very difficult to tell just who exactly is paying the tax. Is it the shareholders, the employees (and if the employees, is it the CEO or the people at the low end of the pyramid) or the customers? It is hard to tell and probably varies from industry to industry. Corporate income taxes are somewhat popular with politicians because they are a form of hidden taxation -- one that people with heartbeats don’t notice but still pay, and which they think that someone else is paying.

However, even companies that pay nothing or next to nothing in actual taxes still pay a high price. To find all the deductions and loopholes that allow them to pay so little, they have to hire small armies of accountants and tax lawyers. They have to structure their economic decisions with one eye on the tax code. Eliminating the corporate income tax altogether would reduce those deadweight costs.

Here's How It Would Work

In return for getting rid of taxes at the corporate level, dividends would have to be taxed at the same rate as ordinary income. The key rationale for a lower tax on dividends is that dividends are “double-taxed -- first at the corporate level and then again at the shareholder level. Eliminate the corporate level and double taxation goes away -- no reason to prefer income from capital over income from labor.

I could perhaps go along with an exclusion of say $2,000 on dividends. Thus if you had a $100,000 portfolio (outside of an IRA or 401-k) that had a yield of 2%, you would pay $0 on those dividends. If you had a $150,000 portfolio, and were in the 35% bracket, then you would pay $350, or an effective 11.67% rate on your dividend income -- still less than you are paying at today’s 15% rate with no exclusion.

The dividend exclusion would be very significant to small investors, and thus encourage people to invest and participate in the market, but would be insignificant to the hedge fund crowd. Also, if the taxes on dividends were to stay at 15%, with corporate income taxes removed, it would make sense for me to turn myself into Dirk van Dijk, Inc. and have Zacks hire the company.

The company would then have a 100% payout ratio to me, its sole shareholder. Presto change-o, the maximum individual tax rate would become the current dividend rate of 15%.

Of course if you did that alone, then companies might stop paying dividends and instead channel that money into share repurchases. Economically, a dividend and the repurchase of stock look very similar.

Just think of a company that paid out a cash dividend but all the shareholders were enrolled in a dividend reinvestment (:DRIP) plan. I would thus make preferential capital gains rates available only for true long-term holdings. Up until five years, capital gains would be paid at ordinary income rates; between five and ten years, you would pay the lesser of your ordinary tax rate or 25%, and only after a 10-year holding period would you pay 15%. The lower rate over long periods of time would compensate for the portion of your capital gains that was really inflation, not “real capital gains.

The same objective could be achieved more exactly if the cost basis of each investment were indexed to inflation, but that would be a bookkeeping nightmare. Smaller gradations between five and ten years might also be possible -- say, reducing the rate by 2% per year, to 23% after 6 years, 21% after seven, etc.

How It Would Help

This change would have the added benefit of focusing investors on, well, being investors -- not just players at the casino. It would, however, be bad news for firms like E-Trade (NasdaqGS:ETFC - News) and Schwab (NYSE:SCHW - News) that depend on the volume of trades. It would not affect the day-trader types, since they are already taxed at ordinary income rates for holdings of less than a year.

As it stands now, one of the biggest areas where the government picks winners and losers is the tax code. If there are special tax breaks that only apply to, say, the oil and gas industry, then the government is favoring that industry over industries that don’t get special breaks.

U.S. Steel Raises Prices

U.S. Steel Corp. (X) announced that it will be raising the spot market prices for its flat rolled products by $60 per ton.

The company is taking this measure to combat increasing raw material costs. As per U.S. Steel, the costs are high and inventories are low and thus it is increasing prices to raise margins.

Recently, the company released its financial results for the second quarter of 2011. The company reported second-quarter 2011 net operating profit of $1.33 per share versus a net operating loss of 17 cents in the year-ago quarter. Results also exceeded the Zacks Consensus Estimate of $1.26 per share.

Net income was $222 million in the quarter versus net loss of $25 million in the second quarter of 2010.

Revenue in the quarter improved 9.4% year over year to $5.1 billion from $4.7 billion. Results were driven primarily by higher average realized prices and stable raw materials costs in Flat-rolled segment. However, results were below the Zacks Consensus Estimate of $5.5 billion.

Shipments totaled 5.5 million tons, down 6.5% year over year, primarily due to weaker demand in Europe that caused a 21% drop in shipments.

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