US stimulus package implications (page 1 of 3)

US equities

Congress on Friday finally passed the hotly debated economic stimulus package worth US$350bn. The centrepiece of the bill is the cut in capital gains and dividend tax to 5% and 15% from the current top rates of 38.6% and 20% for capital gains.

The bill dovetails neatly with our thematic play on stocks offering high and safe dividend yields. Our current dividend plays are Altria (MO, $42.31, CSFB: Outperform) and Carolina Group (CG, $23.66, CSFB: Not Rated). However, it is our belief that the Bill would not necessarily radically change the dividend policy of US corporations as the dividend tax cut only last through to 2009.

Insurance stocks had a pretty rough week, falling 2.96% on average vs. the S&P 500's 1.17% decline. According to a recent report by the Insurance Services Office (ISO), property/casualty insurers are expected to pay out approximately $1.55 billion in insured losses from the severe thunderstorms and tornadoes that struck 18 states from May 2 through May 11. ISO's Property Claims Services unit estimates that insurers will receive more than 429,000 claims from these storms.

For example, Travellers Property Casualty Corp. (TAP/A, $16.21, CSFB: Outperform) sees storm loss damages of $78 million in 2Q'03, or about $0.08 per share. All told, estimated insured losses place the storm system as the third worst windstorm event in U.S. history, behind a $2.2 billion catastrophe loss in April 2001, and a $1.7 billion catastrophe loss in April 2002. For the short-term, we remain cautious on property/casualty insurers.

Life insurers could face a negative impact from the new dividend tax policy. It appears as if dividends received in variable annuity sub-accounts will not receive the same treatment. Given the fact that variable annuities require a long holding period (roughly 12 years) for their tax advantages to overcome higher fees compared to taxable mutual funds, the new policy would erode the tax advantages that annuities have over taxable mutual funds and cause the holding period to extend to about 15 years (source: JP Morgan).

However, we do not believe this would have a significant negative impact on life insurers' stock prices. Therefore we maintain our Buy rating on Aflac Inc. (AFL, $32.67, CSFB: Not rated). The company sells complementary insurance, helping to fill gaps in consumer's primary insurance coverage.

Pfizer has partially recovered from the sell-off after the US Supreme Court decision that the US state of Maine can implement a program to force drug makers to extend discounts to uninsured residents from current 10% to 25%. In Maine around 325,000 people could benefit from such discounts.

The market feared that worse might happen and that this could be a precedent for other states to join in which would hurt the drug industry's revenues.

But as further legal hurdles could prevent the implementation of this program, the worst-case scenario that the market feared, appears not to be likely at this stage. The program has still to be validated by the District Court and needs approval from the Health Secretary, which means that at this point the US Department of state determines the extent to which states are allowed to give discounts on prescription drugs.

A certain implication will be a rise in tone in the discussion about the drug price inflation and the pharmaceutical industry will be under increased pressure to contribute their part to contain the rise in prescription drug prices. This is an issue that has been on the table for years and still it seems far from conclusion, as the pharmaceutical industry has plenty of clout.

In the meantime the weakness in the share price has offered a good buying opportunity for Pfizer Inc.