My Favorite Income Stock Sector For A Corporate Tax Cut
With a new tax cut plan due to be out in weeks, Tim Plaehn shares his favorite income stock sector that will benefit the most from lower taxes. The three companies shared in this article will be able to boost dividends by a large amount if the proposed tax cuts go through.
If you can find the right buy and sell strategies, pure-play refining company stocks can generate some nice profits and dividends for your portfolio. Right now, the business and economic factors point to adding some refining stock shares to your holdings.
If a corporate income tax rate reduction is passed, that event will provide an additional boost to the company profits, dividend payments, and, ultimately, share values.
Refiners face the unique challenge that the prices of both their input materials –crude oil– and their finished products –gasoline, diesel, and other fuels– are set by their own trading markets. As a result, the gross operating margin for a refiner can fluctuate significantly based on the difference in the cost of crude oil and the prices the refiner will receive for the fuels it produces from each barrel of crude.
A company will report a refining margin per barrel in the quarterly earnings results. This margin indicates how the different energy prices have affected profits for the quarter. Investors can forecast future profits by watching a crack spread, with is a profit margin per barrel calculated using current market prices for the different energy commodities.
For example, a 3-2-1 crack spread shows the margin per barrel when three barrels of oil are refined into two barrels of gasoline and one barrel of diesel fuel. A refiner can affect its own margin compared to a crack spread by purchasing different grades of oil from different regions to find the most advantageous price differentials.
The refining companies use a range of strategies to react to the variability of their core business operation inputs. All of them control a midstream MLP to help them manage crude oil costs, storage, and transportation costs. They spend significant amounts of capital to constantly improve the efficiencies and flexibility of the refineries.
Management teams and boards of directors are focused on rewarding shareholders with steady and attractive dividends, special dividends when profits are high, and significant dollar amounts committed to share buy backs.
I think it is the mindsets and histories of sharing excess cash flow with share owners that is a positive for owning refining company stocks when the corporate income tax rate is reduced. Here are three pure-play refining companies and how much a corporate income tax rate reduction from 35% to 15% would affect the cash available to pay dividends or be used to buy in more shares.
For 2016, Valero Energy Corporation (NYSE:VLO) reported net income of $2.3 billion or $4.94 per share. These profits were down about 40% compared to 2015, which was a very, very good year for the refining industry.
VLO investors earned $2.80 per share in dividends. The company spent $2.4 billion during the year to buy back shares. From the earnings statement, Valero paid income taxes of $765 million. In 2015, the tax bill was $1.87 billion. A tax rate reduction would increase net income per share by something in the neighborhood of 50%. It is likely that VLO would significantly increase the quarterly dividend rate. The stock currently yields 4.25%.
For last year, Marathon Petroleum Corp (NYSE:MPC) reported earnings of $1.17 billion, or $2.21 per diluted share. Profits were down more than 50% compared to 2015. Income taxes were $609 million and $1.5 billion in 2016 and 2016, respectively. With MPC, a lower tax rate would boost net income by at least one-third. As profit margins expand, the benefit of lower taxes grows even faster. MPC currently yields 2.9%.
HollyFrontier Corp (NYSE:HFC) will end up at about break even for 2016. In 2015 the company reported net income of $805 million, or $3.90 per share after paying $406 million in income taxes. In a good year like 2015, a lower tax rate would increase HollyFrontier’s net income by more than 60%. The company has paid a steady $0.33 per share quarterly dividend since the second quarter of 2015. In the past, when profits were high, the company would declare an extra $0.50 dividend on top of the regular quarterly payout. HFC currently yields 4.4%.
With its 5.6% yield, investment grade credit rating and growing dividends this is a good example of a REIT investment that will provide attractive total returns through the short-term news cycles. GPT’s growing dividend puts it ahead of many other high-yield stocks in the REIT sector,
The three companies above all have shareholder-friendly management teams that focus on building wealth for stock holders by increasing dividends. A large tax cut on the horizon should see some nicely increased dividends in this sector and for many other shareholder-friendly high-yield dividend stocks. If the tax cut goes through as planned many high-yield stocks should see significant increases in their dividends paid, a boon for stock prices and potential income in the sector.
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Category: Commodities
