Fiscal Cliff Deal Lessens Impact on Utility Sector: Dividend Tax Rate Increase Avoids ‘Worst-Case Scenario’; Initial Market Response Positive

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Target Rock Advisors, LLC announced today that early investor response to the ‘fiscal cliff’ deal by the U. S. Congress has been positive for the utility stocks that are tracked as part of the Target Rock Composite Utility Index. A potential 264% dividend tax rate increase was avoided and resolved to represent a 33% increase.

Target Rock Advisors, LLC announced today that early investor response to the ‘fiscal cliff’ deal by the U. S. Congress has been positive for the utility stocks that are tracked as part of the Target Rock Composite Utility Index. A potential 264% dividend tax rate increase was avoided and resolved to represent a 33% increase.

"There's no question that the dividend tax rate increase component of the American Taxpayer Relief Act of 2012 will have a negative effect on many utility industry shareholders," said Kyle Rudden, a Target Rock co-founder and Partner. "Not only is the industry traditionally an income producing sector, but because of that it has a substantial retail investor base; many investors are among those most impacted by the tax rate increase." The 46 utilities in the Target Rock Composite Utility Index have an average dividend yield of 4.2% and earnings payout ratio of 70% compared to an S&P 500 yield of 2.1% and payout ratio of about 30%. Retail ownership of the companies comprising the Target Rock Composite Utility Index is 34% versus around 20% for the S&P 500.

"Even a negative can be a positive when it's better than expectations.” said Rudden. "Whenever there is ample uncertainty associated with major events that could have material and far-reaching adverse implications, the worst-case scenario often gets priced into stocks, so even negative news can lift share prices if the event outcome isn't as bad as it could have been. In this case, the ‘bad’ news is that the tax rate on everyone’s dividends has increased to 20% from 15%, or by fully a third. The good news is that the rate could have gone up substantially more on many individuals. For individuals earning more than $400,000 per year (and couples earning more than $450,000), the increase could have been as high as 264%. In our opinion, that level of increase would have significantly reduced the attractiveness of utilities as a sustainable, long term investment.”

In the two months prior to the passage of the Act on January 1, 2013 the Target Rock Composite Utility Index posted a compound annual growth rate (total return) of -4.1%. In the six trading days following January 1 it generated a positive CAGR of 2.6%. Some of this price recovery represents a broader multi-sector market response, but in our view much is attributable to the change in tax policy.

“Adequate yields and fair tax treatment of dividend income are essential for the long term sustainability of the utility industry and the growth of critical infrastructure,” said Rudden “While the ATRA has reduced after-tax yields overall, we do not feel that the tax hike will be particularly adverse to the sector.”

EDITOR NOTES:

  •     Utilities traditionally offer consistent, stable growth with high income potential, particularly attractive in this volatile environment and to an aging population
  •      Sustainable energy is a growing public concern and correlates with better utility stock performance
  •     Target Rock Advisors are experts in the utility industry, specializing in identifying and enhancing sustainable practices and advantages. The team has over 250 cumulative years of energy industry experience
  •      Target Rock has developed a family of sustainability and ESG stock market indexes that track the total returns of the 46 companies it covers. In the long term, many of Target Rock’s indexes have outperformed the broader market indexes. Details on the indexes are available on the company’s website at http://www.targetrockadvisors.com/go-interactive/index-charts/

About Target Rock Advisors

Target Rock Advisors, LLC provides advisory services to utilities, to the investment community that follows utilities, and to investors building portfolios of sustainable holdings. Target Rock explores the complex relationship between the elements of the classic pillars of sustainability: environment, economy and society, also referred to as the triple-bottom-line. The Target Rock Sustainability and ESG indexes are based on a complex model of 2.4 million data points in over 200 dimensions that supports the unique analysis that Target Rock performs. (Readers can access and explore the matrix at http://www.targetrockadvisors.com/scores-indexes-listed/) The Target Rock Sustainability index guides investors in making more informed decisions by bringing to light the truly great utility sustainability leaders and their relative strengths and weaknesses. It also helps utilities by setting the benchmarks for achievement in a wide variety of sustainability-related activities.

For more information visit http://www.targetrockadvisors.com.

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