Market Perspectives: Donuts, Buybacks and Dividends
Last month, markets awoke to a merger announcement between Canadian icon, Tim Hortons, and US-based Burger King (BK). A principal driver behind the deal was the resulting tax inversion, whereby the old BK becomes “Canadian” for purposes of lowering its payable taxes.
We expect the new Tim Hortons will look much different as a direct result of the differences in US and Canadian tax policy. While marginal income tax rates are clearly important to investors like us, at LFA we are especially interested in how after-tax income is returned to us as shareholders. Traditionally, dividends have been the preferred vehicle to remit profits to shareholders. Over the past 25 years, however, share buybacks have taken a larger role in returning shareholder profits. Differences in taxation have much to do with the dividend versus buyback preference.
In Canada, we have learned to love dividends as much as our coffee and donuts. One of the key reasons dividends are appreciated in Canada is that our dividend tax credit structure attempts to eliminate what is referred to as double taxation of corporate income (the taxation of profits at the corporate level as well as the taxation of distributed profits – the dividend – at the individual level). In Canada, our tax structure is such that investors are generally indifferent between capital gains and dividends. Since the US does not have such favourable tax treatment of dividend income, there, gains are generally preferred to dividends. The result is that, in general, US stocks tend to have lower dividend yields than Canadian stocks, and buybacks tend to represent the preferred way to return shareholder cash.
Read more Market Perspectives – September, 2014.
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