Clean Up Your Portfolio: Ditch the Dirty Stocks
Feb 3rd 2012 3:16PM
Updated Feb 3rd 2012 3:18PM
America's fiscal situation is a shambles, and our marketplace is fraught with dysfunction. We've let dirty dealers get away with far too much. Many of those corrupt players are the "corporate people" whose wallets were loosened by the Supreme Court Citizens United case two years ago.
We could define "dirty players" in many ways, but one of the ways our market is distorted is by the torrent of shareholder capital that is deployed in an extremely unproductive way: corporations lobbying for political advantage in an increasingly false marketplace.
The U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice recently released a report outing what they call "The Dirty Thirty." According to the Representation Without Taxation report, these 30 Fortune 500 companies spend big bucks on lobbying, all the while taking advantage of loopholes to dodge paying billions in taxes.
The report identified 280 profitable Fortune 500 firms that paid an effective tax rate of 18.5%, about half of the statutory 35% corporate tax rate, and raked in $223 billion in tax subsidies. Those companies shelled out $2 billion on lobbying related to taxation and other issues between 2008 and 2010.
The "Dirty Thirty" were particularly aggressive at both lobbying and avoiding taxes. These 30 companies took $10.6 billion in tax rebates and avoided the $67.9 billion in taxes they would have paid had they been subject to the 35% tax rate.
Hey, big spender
The "Dirty Thirty" includes some well-known consumer names and highly recognized stocks. Let's take a look at a few.
Washington, D.C.-based utility Pepco (NYS: POM) isn't just "dirty," it's hated, too. The American Customer Satisfaction Index gave it a dubious distinction; it was named "the most hated company in America" last summer because it drives its customers "berserk."
Pepco happens to reside at the very top of the Dirty Thirty list. Pepco shelled out $3.8 million in lobbying dollars while enjoying a negative 57.6% tax rate. Having also enjoyed $816.7 million in tax subsidies, it generated $882 million in profits. You'd think its service wouldn't stink so bad given the cushy deal it has at the expense of everyday Americans, right?
General Electric (NYS: GE) , not surprisingly, came in at No. 2. It shelled out a mind-boggling $84.4 million in lobbying expenses, and reaped $8.4 billion in tax subsidies. It also happens to have 14 subsidiaries in tax havens.
GE landed in the tax avoidance spotlight last year, and defended itself by saying it did pay taxes, and plenty of them, too ($2.7 billion). It didn't clarify that those were worldwide taxes. Here at home, maybe GE brings good things to living, all while living relatively scot-free.
The list included some big, big spenders. Verizon (NYS: VZ) , Boeing (NYS: BA) , and PG&E (NYS: PCG) all coughed up some serious cash on lobbying expenses. Verizon and Boeing both shelled out $52.3 million, and PG&E expended a lot of "energy" in this area, spending $79 million.
Dirty stocks, deteriorating businesses
The Dirty Thirty report focuses on the ironic correlation between the millions some corporate managements are willing to spend on lobbying to lower tax burdens versus the millions in tax savings they generate. The irony is that both of these are uses of companies' shareholder capital, and investors will defend one use while decrying the other.
In reality, lobbying's a negative for truly free-market-minded investors who care more about owning truly good businesses than short-term, stock-price machinations (and distortions).
Although many modern investors may have swallowed the line that lobbying's an inevitable expense of doing business (and taxation is bad, bad, bad!), the truth is, lobbying at its heart probably indicates a reality nobody wants to talk about: shoddy, noncompetitive business models that may not enrich shareholders or true, American, economic well-being, even without the tax-dodging component. Call me crazy, but maybe the millions in lobbying expenditures would be better spent on good old-fashioned R&D and real, job-creating innovations.
Earlier this week, MSNBC's Dylan Ratigan, originator of the Get the Money Out of politics campaign and author of the new book Greedy Bastards, came to speak here at Fool HQ. One statement Ratigan made should resonate with all self-respecting shareholders: Lobbying is actually a sign of a deteriorating business that's not functioning well on a core level. See a related clip below:
When companies lobby government to get a leg up or preferential treatment of any kind, that's a solid sign they aren't very strong on their own business merits, even if they have the capital to sling around on lobbying. These companies are also basically pushing for a false marketplace, and as Ratigan puts it, causing distortions in price integrity that mess up our markets even worse.
Beware companies like the Dirty Thirty, and push for full disclosure of corporate political spending. This year's proxy season should follow in last year's footsteps, including a large amount of shareholder resolutions demanding that companies get the message and disclose their political spending. Let's keep an eye out for those and vote accordingly at the companies we own.
To invest with real business growth in mind, investors can seek out industry disruptors instead of lobbying, legacy losers desperate to protect their deteriorating, old-school turf. Click the link to download your report to Discover the Next Rule-Breaking Multibagger, absolutely free.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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