Corporate Profits
Also referred to as “corporate earnings” and “company earnings:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.
How You Can Beat the Higher Taxes Coming Up
By Sasha Cekerevac, BA for Profit Confidential
As the realization that the political structure in America is steering far more leftward sets in, businesses and investors are beginning to fear the substantial increase in dividend and capital gains taxes. Many investors have been searching for dividend yield to sustain income due to the absence of adequate bond yields. This area of income generation, dividend yield, will most likely be hit extremely hard with the increase in tax rates. While corporate profits are at massive levels in absolute terms, the problem will be in delivering these gains to shareholders.
In lieu of raising the regular dividend yield, many corporations are looking to pay out their corporate profits in special, one-time dividend payments. The reason being that firms are looking to disperse corporate profits before the tax rates hit. If they were to simply raise the dividend yield, once the tax rates are increased, investors would lose a substantial amount of money to the government. By getting ahead of the dividend yield tax-rate hike with a special one-time payment, firms are able to disperse corporate profits using an advantageous method for investors.
Chart courtesy of www.StockCharts.com
We’re already seeing this from several firms, such as Wynn Resorts, Limited (NASDAQ/WYNN). While Wynn Resorts has paid out a special dividend over the last few years, I think part of the impetus to do so this year is to take advantage of the current lower tax rates on the dividend yield. The one-time $5.00 payment will be dispersed on December 21 to shareholders of record on November 23. (Source: “Wynn Resorts Rises After Declaring $5 a Share Dividend,” Bloomberg, November … Read More
What Just Happened at Yahoo! That You Should Know About
By Sasha Cekerevac, BA for Profit Confidential
Marissa Mayer, the new CEO of Yahoo! Inc. (NASDAQ/YHOO), recently spoke about her plans for the future of the company. As we all know, technology stocks in this sector are constantly evolving. At one time, Yahoo! was a giant among technology stocks; those days have long since passed. Growth in corporate profits has been evasive for the firm, and Mayer took this opportunity to voice her opinion on where the company should be heading.
Mayer comes from Google Inc. (NASDAQ/GOOG) with an engineering background. She helped build the Google brand and, ultimately, drive corporate profits. While her success at Google is laudable, the long-term problems at Yahoo! still exist. To begin with, she’s announced a dramatically redesigned homepage. She believes that this, along with changes to the search and e-mail functions, will help attract more viewers to Yahoo! and, ultimately, raise corporate profits.
Her plan includes a greater focus on its mobile platform. All technology stocks and their investors are spending a lot of time scrutinizing mobile platforms. This segment will be a crucial push for the next leg of higher corporate profits. The number of smartphone users is growing, and this segment will be critical to the success of technology stocks over the next decade. Technology stocks that can’t convert users into corporate profits will most likely see their shares languish.
Mayer also spent some time discussing the need to attract talent. I’ve lamented on this topic before; once technology stocks start to fall behind, the best talent starts to leave. As innovation is the key driver for corporate profits growth in this industry, technology stocks need to be … Read More
A Chilling Indicator of What’s Ahead for the Economy
By Michael Lombardi, MBA for Profit Confidential
Earlier this year, I introduced a popular key indicator—the Baltic Dry Index—that measures the shipping rates of transporting bulk dry commodities worldwide.
It is considered a key indicator because it gauges the demand of the basic raw material inputs that go into every factor of finished goods, building materials, and food.
This key indicator registers a high number when economies are strong because of strong demand for all commodities like zinc, iron ore, iron, steel, etc. In an economic slowdown, demand falls, and so do rates.
Due to the economic slowdown, in January of this year, this key indicator reached a 25-year low. Since then, the index has just continued to fall, and remains near its low. Since 2008, this key indictor has plunged 90%!
Here is the three-year chart, which is further evidence of a global economic slowdown:
Chart courtesy of www.StockCharts.com
During the economic boom—back in 2006-2007—the orders were flooding into the shipbuilders for new container ships to pick up and deliver all of these raw materials. The premise was that the boom was only going to continue.
After the financial crisis of 2008, the orders for new containers could not be cancelled, resulting in a glut of ships sitting empty or delivering goods for literally pennies…sometimes at a loss.
One of the last remnants of Britain’s industrial revolution, Stephenson Clarke Shipping, just went bankrupt after almost 300 years in business. (Source: The Telegraph, August 13, 2012.)
The company stated that while it was able to weather previous economic slowdowns, it found this current economic slowdown to be one of the worst in its … Read More
Dow Jones Transportation Index Signals Trouble Ahead
By Mitchell Clark, B.Comm. for Profit Confidential
It is summertime, and you expect the trading action in the stock market to be subdued, but there’s a big divergence taking place, and it isn’t good. The Dow Jones Transportation Index is not confirming the primary trend of the Dow Jones Industrials or the S&P 500 Index. The divergence started in mid-July and follows a stock market with lackluster trading volume and poor breadth.
The Dow Jones Transportation Index reflects current fundamentals, more so than the other stock market averages, which have been going up on the hope for new action from the Federal Reserve. This is why I think the stock market is in the process of topping out. Unless we get a big boost inU.S. economic news or new monetary stimulus from the Fed, I don’t see how the stock market can advance further.
Since the beginning of June, the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index have all done well, albeit on low trading volume. But the divergence with the Dow Jones Transportation Index really bothers me, because many of the large-cap companies that make up the Dow Jones Transportation Index have been excellent stock market leaders for some time now. (See “The Top Stocks Making Money in This Market Right Now.”) If the divergence continues, this will be a bad technical signal.
With the Dow Jones Industrials over 13,000 and the S&P 500 Index at 1,400, I’d have to say that the stock market is fairly but fully valued. Corporate earnings have been exceptionally good, considering all the turmoil in the global economy, and it is difficult to see … Read More
Stock Market Trading Action Signals Breakout Coming
By Mitchell Clark, B.Comm. for Profit Confidential
Ever since the beginning of June, when the stock market came out of its correction, there has been seesaw-trading action with three meaningful peaks and valleys in the S&P 500 Index. We’re now working on the fourth, and who knows where it will lead.
Expectations for corporate profits continue to come down, and any positive investor sentiment is likely due to the lingering hope for additional monetary stimulus from the Federal Reserve. It really is a wacky stock market these days, because there is no certainty. Stock market investors don’t have any reasonable expectation of what their holdings might do, and therefore, investment risk remains very high.
The only thing that’s reasonable for equity investors to feel certain about is the outlook for dividends. Corporations continue to hoard cash, because they too feel the uncertainty in their operations. So why invest in new plant equipment or employees when the global picture is so cloudy? And even if dividend payments aren’t going up, there is so much cash on corporate balance sheets that most large-cap companies are assured of continued dividend rates through the worst of recessions.
Because expectations for corporate profits are falling, so are expectations for increased dividends. Even though corporations can afford it, we’re likely to see fewer companies raising their dividends to shareholders, particularly if general economic growth remains weak. You know you’re in tough times when the stock market goes up after second-quarter economic growth is reported at 1.5% on an annualized basis.
Dividends have been a stock market investor’s best friend for the last decade, and if you think the U.S. economy will toy … Read More
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