Question:
Would you consider Sigma-Aldrich (NASDAQ: SIAL) for purchase, or would a Materials ETF be a better choice? Currently, I have no appreciable holdings in the materials sector.
Also do you have a favorite sector that you would overweight at this time? And some picks in that sector.
Answer:
We own the Materials Select Sector SPDR (NYSE: XLB), which seeks to track the price and yield performance of the Materials Sector of the S&P. Materials is a small sector with a variety of different companies. The Materials SPDR is about 4.5% of our portfolio, which is about 25% overweight compared to the S&P Index.
Sigma-Aldrich is a solid company that meets our minimum stock screening requirements. The Company develops, manufactures, purchases and distributes a range of chemicals, biochemicals and equipment. These chemical products and kits are used in scientific research, and regular sales are to universities, hospitals, health facilities and government agencies. It has a safety rank of 1 from Value Line, and it pays a dividend of 1%. Right now the stock appears a little pricey as its price to earnings ratio is 21.7.
Currently, we are 35% overweight in Consumer Staples. We see inflation rising, and Consumer Staples can pass along rising costs quicker than other sectors. The general cycle to pass along costs is between three and five years. Consumer Staples can generally pass along cost increases to the consumer within the first year. We recently added British American Tobacco (NYSE: BTI) and Kimberly Clark Corp. (NYSE: KMB). British American Tobacco has 55% of sales coming from emerging markets, where tobacco use is not as taboo as it is in the United States. We also have increased our holdings in H.J. Heinz Company (NYSE: HNZ).
Question:
Curious, is there any real threat in the current Federal Budget reduction plans to end the tax benefits of the MLP (single taxation, etc.) like they did in Canada a few years ago?
Answer:
Master Limited Partnerships (MLP) are a type of limited partnership that is publicly traded. For a partnership to be classified as an MLP, the partnership must derive about 90% of its cash flows from real estate, natural resources and commodities. The advantage of an MLP is that it combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. The partnership does not pay taxes from the profit. The money is only taxed when unitholders receive distributions.
We see the biggest benefit in the depletion and depreciation of the MLP. Because of its structure, an MLP gets to pass its depreciation of assets and expenses through to investors, who may be able to use the pass-through expenses to reduce or eliminate the tax on the income received from that particular investment. The money you receive back is not really a dividend. It is a return on your capital, so a good portion is tax free.
Taxation on MLPs is definitely up for consideration during the budget reduction negotiations, and we believe they will be taxed differently in the future. We believe it is hard to justify making tax-driven investment decision because tax laws can change.