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Look to tax bills as sign of strength

| Tuesday, Jan. 22, 2013, 12:01 a.m.

As a citizen and as a stock analyst, I like to see corporations paying taxes.

As a citizen, I figure that if Apple Inc. paid $14 billion in taxes last year (mostly to the United States), that might keep my own tax bill from climbing too much.

As an analyst, I view taxes as a sincerity barometer. You can bet corporations rarely pay taxes unless they made some profits to pay taxes on.

Many corporate executives resemble teenagers. When you ask a teenager how things went at school today, more than likely he or she will say, “fine.” It might be fine, and it might not.

Similarly, corporate chieftains usually say that things are going well – or at least, that they are about to get better.

So, investors need to separate hype from reality. Corporate taxes paid can be a good sign, because they indicate that genuine wealth is being generated.

Top Taxpayers

Here are the top 10 U.S. publicly owned corporations, ranked by taxes paid to all governments (not just to the United States).

• Exxon Mobil Corp, $30.9 billion

• Chevron Corp., $20.1 billion

• Apple Inc., $14 billion

• ConocoPhillips, $9.2 billion

• Wells Fargo & Co., $9.1 billion

• Wal-Mart Stores Inc., $8.2 billion

• JPMorgan Chase & Co., $7.6 billion

• Berkshire Hathaway Inc., $6.1 billion

• International Business Machines Corp., $5.1 billion

• Microsoft Corp., $4.8 billion.

I think any of these 10 are a reasonable purchase for a conservative portfolio. But of course I like some more than others.

I own Exxon Mobil (XOM) for most of my clients. For some clients, I own Berkshire Hathaway (BRK class B), JPMorgan Chase (JPM), and Microsoft (MSFT).

One thing that draws me to Exxon is its muscular balance sheet. It has $13 billion in cash, and only $9 billion in long-term debt.

Exxon's steadiness is both a virtue and a defect. During the Great Recession, it stayed profitable, earning $3.98 a share in 2009 compared with a record $8.66 the year before. However, there's not a lot of growth here. In the year that just ended, analysts figure Exxon earned about $8.61 a share.

Berkshire Hathaway's biggest strength is the genius of its CEO, Warren Buffett. Its biggest weakness is that Buffett is 82.

At first glance, Berkshire shares might look expensive, selling for 19 times earnings. But the P/E is misleading for a company like Berkshire, which owns chunks of several huge companies – but not enough to consolidate their earnings with its own.

For example, Berkshire owns 8.9 percent of Coca-Cola Co., 13.7 percent of American Express Co., 1.9 percent of Procter & Gamble Co., and 3.2 percent of US Bancorp. Perhaps a better measure for Berkshire is the price/book ratio, which is reasonable at 1.3.

JPMorgan attracted a lot of adverse publicity for a giant trading scandal last year. Now CEO Jamie Dimon's compensation has been chopped in half as punishment. My view: The bank is sound, Dimon is capable, and the stock is a bargain at 8 times earnings.

Microsoft no longer inspires adulation now that its growth rate is that of a normal company – about 8 percent for the past five years. But it still has abnormally high profits, with a return on equity of more than 24 percent last fiscal year.

Of the six stocks shown above that I don't own, I probably like Apple (AAPL) best. It has fallen from around $700 a share in September to about $500 now, because investors are worried about increasing competition in tablet computers, and about whether Tim Cook can live up to Steve Jobs' legacy as CEO.

The company has been phenomenally successful, as witness the 212 percent total return to investors over the past five years – more than eight times the return on the Standard & Poor's 500 Index. At the new, reduced price I think Apple is OK to buy.

Of the three big oil companies shown above, I prefer Exxon but it's a close call. Chevron is a little less profitable, but its shares are a little cheaper. ConocoPhillips (COP) has a rich dividend yield, 4.5 percent.

International Business Machines (IBM) has many strong points, but its debt level – 155 percent of equity -- troubles me. I prefer less leverage.

Wells Fargo (WFC) is a good bank, but its level of nonperforming loans, recently 2.9 percent of all loans, gives me jitters.

I imagine Wal-Mart (WMT) will be a market performer or better, but its main selling point is low prices. I worry that its customers will trade up if the economy strengthens.

John Dorfman is chairman of Thunderstorm Capital in Boston; jdorfman@thunderstormcapital.com.

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