Recently, The New York Timesreported that General Electric (GE) is keeping its tax rate low by exploiting the loopholes in the tax code that it helped to create in the first place. GE’s effective tax rate was 7.4% in 2010. Effective tax rate is calculated by using accounting taxes rather than cash taxes. In 2010 GE paid $2.67 Billion in cash for taxes, but its accounting taxes were only $1.05 Billion.
We believe investors should invest in stocks with high effective tax rates rather than low effective tax rates. These companies are usually more profitable. They also don’t effectively exploit the tax loopholes, but if they do, it will probably boost their stock prices significantly.
In order to display how this strategy works, we compiled a list of 30 Dow components and ranked them based on their annual effective tax rates in 2010. Here's how the top and bottom halves performed in 2010:
| HIGHER EFFECTIVE TAX RATES | Effective Tax Rate 2010 | 2010 Return | |
| EXXON | XOM | 40.7% | 9.78% |
| MERCK | MRK | 40.6% | 2.79% |
| CHEVRON | CVX | 40.3% | 22.21% |
| HOME DEPOT | HD | 36.7% | 24.46% |
| WALT DISNEY | DIS | 34.9% | 17.55% |
| WAL-MART | WMT | 32.2% | 3.17% |
| AMERICAN EXPRESS | AXP | 32.0% | 7.70% |
| KRAFT FOODS | KFT | 31.5% | 20.20% |
| MC DONALD'S | MCD | 29.3% | 26.55% |
| INTEL | INTC | 28.6% | 6.19% |
| UNITED TECHNOLOGIES | UTX | 27.9% | 15.86% |
| 3M | MMM | 27.7% | 6.93% |
| ALCOA | AA | 27.0% | -3.78% |
| BOEING | BA | 26.5% | 23.67% |
| CATERPILLAR | CAT | 25.8% | 67.36% |
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| AVERAGE | 16.71% |
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