Biotech Values

[DewDiligence]

(PCL)…the change in [tax] law [starting 1/1/13 if there is no 11th-hour compromise] should not affect payouts from REITs or MLPs. I suppose one might say that those two classes of investment will become relatively more attractive, if the 15% qualified dividend advantage of regular C corporations disappears.

One exception to the above is Plum Creek Timber (PCL), which happens to be one of my largest holdings. Although it’s an REIT, PCL’s distributions to shareholders are taxable as long-term capital gains (because they stem from gains in the company’s “tree capital” that is recognized by a quirk in the tax code) rather than ordinary income.

If the current personal income-tax rates for qualified dividends and LT capital gains are allowed to increase with the latter going from 15% to 20%, the effect on PCL will be mostly negative due to the 500-BP increase in the tax rate; however, as you noted above, the disparity between PCL’s new 20% rate and the top rate on ordinary dividends would widen, which might help to cushion the effect of the increased tax rate on PCL’s own distributions.

Yet another PCL wrinkle is that taxable investors with unused capital losses from prior years pay essentially a 0% rate on PCL’s distributions until their carryforward is exhausted.