Payroll Tax Cut: Will These Stocks Benefit From an Extension?

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Payroll tax cuts for employees are set to expire on December 31 unless Congress can agree to extend, and potentially expand, the tax break. But given the number of disappointments Congress has dished out in the last year, the likelihood of agreeing on anything as important as tax cuts may be a (small-f) fool's hope.

Congressional debates
Officials are off, however, to a decent start. Congressional Democrats are united in support for the payroll tax cut to prevent a tax increase for the middle class in 2012. They will put pressure on Republican house leaders to reach a deal on the extensions before the break expires, reports Bloomberg.

House Speaker John Boehner said of the GOP party, "I feel confident in our ability to move ahead" with the payroll tax cut legislation. The GOP however, wants to couple the continuation of the tax cut with a provision that assures construction of an oil pipeline from Canada to Texas.

President Obama said he would reject any effort to tie extension of the tax cut to accelerate approval of the pipeline. He adds that the tax cuts "shouldn't be held hostage" by another issue.

Here are some key data points about the payroll tax:

  • The 12.4% payroll tax that funds Social Security is evenly split between employers and employees.
  • The portion paid by workers was lowered to 4.2% in 2011 as the employer portion remained at 6.2%.
  • Unless Congress acts, workers in 2012 would again face a payroll tax of 6.2% of their wages up to $110,100.

President Obama is proposing:

  • A one-year extension and expansion of the tax holiday already in place.
  • For the employee portion of the payroll tax: Cut it to 3.1% from the 2011 rate of 4.2%.
  • For the employer portion of the payroll tax: Cut it to 3.1% from the 6.2% on the first $5 million of payroll next year.
  • A complete employer payroll tax holiday for companies that grow their payrolls up to $50 million in a year by hiring new workers or raising the salaries of existing workers.

Investing ideas
Foreseeably, these tax cuts benefit the lower and middle classes. For example, cuts will put $2,170 next year in the pockets of married couple filing jointly with $70,000 in gross income, according to White House estimates.

When the middle and lower classes have tax breaks, most of the money will likely be spent, putting the dollars back into the system. This is good news for the economy, and good news for consumer goods companies because they are first in line to benefit from increased spending.

So we were wondering, if Congress agrees to expand the cut, which companies could benefit most? To find out we compiled a universe of U.S. consumer goods companies with strong dividends-yields above 2% and payout ratios below 50%.

We then collected profitability data and identified the final list of companies that have reported higher than average profit margins over the trailing 12 months (TTM).

Do you think these names will benefit from a resolution? (Click here to access free, interactive tools to analyze these ideas.)

1. Colgate-Palmolive (NYS: CL) : Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. Market cap of $44.14B. TTM gross margin at 60.39% vs. industry gross margin at 52.28%. TTM operating margin at 23.52% vs. industry operating margin at 18.65%. TTM pre-tax margin at 22.79% vs. industry pre-tax margin at 17.54%. Dividend yield at 2.54%. Payout ratio at 44.15%.

2. General Mills (NYS: GIS) : General Mills, manufactures and markets branded consumer foods worldwide. Market cap of $26.10B. TTM gross margin at 41.87% vs. industry gross margin at 33.10%. TTM operating margin at 17.37% vs. industry operating margin at 12.07%. TTM pre-tax margin at 15.86% vs. industry pre-tax margin at 9.55%. Dividend yield at 3.01%. Payout ratio at 43.05%.

3. Hasbro (NYS: HAS) : Engages in the design, manufacture, and marketing of games and toys. Market cap of $4.78B. TTM gross margin at 59.68% vs. industry gross margin at 45.17%. TTM operating margin at 14.01% vs. industry operating margin at 11.52%. TTM pre-tax margin at 11.11% vs. industry pre-tax margin at 9.38%. Dividend yield at 3.24%. Payout ratio at 38.63%.

4. Hershey (NYS: HSY) : Engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. Market cap of $13.10B. TTM gross margin at 46.01% vs. industry gross margin at 33.10%. TTM operating margin at 17.78% vs. industry operating margin at 12.07%. TTM pre-tax margin at 15.93% vs. industry pre-tax margin at 9.55%. Dividend yield at 2.37%. Payout ratio at 48.02%.

5. Kellogg Company (NYS: K) : Kellogg Company and its subsidiaries manufacture and market ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. Market cap of $17.90B. TTM gross margin at 44.70% vs. industry gross margin at 33.08%. TTM operating margin at 15.20% vs. industry operating margin at 12.08%. TTM pre-tax margin at 12.66% vs. industry pre-tax margin at 9.55%. Dividend yield at 3.45%. Payout ratio at 37.47%.

6. The Coca-Cola Company (NYS: KO) : Distributes, and markets nonalcoholic beverages worldwide. Market cap of $151.67B. TTM gross margin at 65.50% vs. industry gross margin at 59.07%. TTM operating margin at 23.33% vs. industry operating margin at 22.90%. TTM pre-tax margin at 33.62% vs. industry pre-tax margin at 24.12%. Dividend yield at 2.82%. Payout ratio at 33.32%.

7. McCormick & Co. (NYS: MKC) : Engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. Market cap of $6.58B. TTM gross margin at 44.52% vs. industry gross margin at 33.10%. TTM operating margin at 15.05% vs. industry operating margin at 12.07%. TTM pre-tax margin at 14.42% vs. industry pre-tax margin at 9.55%. Dividend yield at 2.51%. Payout ratio at 39.63%.

8. Packaging Corp. of America (NYS: PKG) : Produces and sells containerboard and corrugated products in the United States. Market cap of $2.52B. TTM gross margin at 27.65% vs. industry gross margin at 22.89%. TTM operating margin at 11.65% vs. industry operating margin at 9.53%. TTM pre-tax margin at 10.56% vs. industry pre-tax margin at 6.37%. Dividend yield at 3.16%. Payout ratio at 43.8%.

9. Sealed Air (NYS: SEE) : Sealed Air Corporation, through its subsidiaries, manufactures and sells packaging and performance-based materials and equipment systems worldwide. Market cap of $3.59B. TTM gross margin at 30.06% vs. industry gross margin at 22.89%. TTM operating margin at 11.71% vs. industry operating margin at 9.53%. TTM pre-tax margin at 6.84% vs. industry pre-tax margin at 6.37%. Dividend yield at 2.78%. Payout ratio at 33.84%.

10. The J. M. Smucker Company (NYS: SJM) : Engages in the manufacture and marketing of branded food products in the United States and internationally. Market cap of $8.72B. TTM gross margin at 38.30% vs. industry gross margin at 33.10%. TTM operating margin at 17.55% vs. industry operating margin at 12.07%. TTM pre-tax margin at 13.57% vs. industry pre-tax margin at 9.55%. Dividend yield at 2.51%. Payout ratio at 45.6%.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Profitability data sourced from Fidelity. All other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola, McCormick, Hasbro, and Kellogg. 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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