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Telecoms Fight Dividend Tax Change
By
Shayndi Raic
The
Wall Street Journal
September 08, 2010
The industry has
historically attracted investors who see the companies as
relatively safe investments that pay rich dividends, making it
especially sensitive to the coming changes in tax rates.
Although some
economists argue that the telecom industry is overstating its
case, industry giants AT&T Inc. and Verizon Communications Inc.
and smaller carriers such as Frontier Communications Corp. are
lobbying to head off a big increase in the tax on dividend
income next year.
"It's a huge issue
for dividend payers," says Craig Moffett, a telecom and cable
analyst at Sanford C. Bernstein. "That's no small appeal to the
stocks from the investor base."
Half of the Top 10
highest-yielding stocks in the Standard & Poor's 500-stock index
are telecommunications companies, including AT&T, Verizon,
Frontier Communications, Windstream Corp. and CenturyLink. On
Sept. 2, Verizon raised its annual dividend five cents to $1.95,
giving it a yield of 6.5%. Frontier offers the highest yield on
the S&P 500, at 9.6%.
If Congress doesn't
act, tax cuts passed under former President George W. Bush will
expire in January, and dividends would be taxed at the same rate
as income, jumping to as much as 36.9% from the current rate of
15%.
"Our company does not
think this is the right time to be doing this sort of thing,"
said Steven Crosby, senior vice president for government and
regulatory affairs at Frontier Communications.
The disagreement
reflects an increasingly wary relationship between the industry
and the Obama administration. Telecom operators complain they
are already suffering from regulatory uncertainty over issues
like net neutrality and broadband regulation, as well as the
administration's greater scrutiny of mergers and acquisitions.
President Obama says
he wants dividends for wealthy Americans to be taxed at 20%, the
same rate that would be in effect for capital gains, and some
Democrats on Capitol Hill have called for a short-term extension
of all the tax cuts, including those for the wealthy. The
conventional wisdom in
Telecom companies
have coordinated their efforts to extend the tax breaks through
the
The industry argues
that a dividend tax spike would hurt the economic recovery by
deterring investment as demand for their stocks subsides.
Telecom is one of the country's most capital-intensive
industries, with operators spending $47 billion last year
upgrading and building communications networks, according to
USTelecom.
"At a time when the
administration is looking to stimulate the economy, what would
not be wise policy would be to take the one sector that had
continued to invest and continued to grow" and place additional
taxes on it, said Walter McCormick Jr., president of USTelecom.
In a letter to the
president in late July, the coalition argued that higher taxes
on dividends would hurt "American investors of all incomes
levels, especially seniors who rely on dividend income to
supplement their fixed monthly income." More recently, the
coalition has focused its efforts on lobbying conservative "Blue
Dog" Democrats that it thinks will be more receptive to the
issue.
Some economists argue
higher taxes on dividends wouldn't reduce the appeal of telecom
stocks, since a growing share of
"If there is an
effect, it will be modest,"
And some analysts say
telecom stocks will remain an attractive option even after the
tax break expires, given the low yields available on investments
such as
-Martin Vaughan
contributed to this article.
Copyright 2009 Dow
Jones & Company, Inc. All Rights Reserved
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