Money & Business
Money Watch: GM's Dividend Cut Sends a Message: Help!; Saving for College? Prepaid Plans Just Got Much Better; Here's One Tax Washington Can't (or Won't) Fix
GM's Dividend Cut Sends a Message: Help!
In explaining why General Motors was cutting its dividend payment in half--in addition to slashing senior manager pay and retiree health benefits--GM Chief Executive Rick Wagoner said "these are difficult decisions that involve sacrifices by our employees, stockholders, retirees, and the senior leadership team." But he also communicated just how dire GM's financial situation is. On Wall Street, dividend cuts are viewed as a move of absolute last resort. "You're telling your investors--you're telling your competitors--that you've got a big problem on your hands and that you need to conserve cash," says Howard Silverblatt, market equity analyst for Standard & Poor's. GM's main rival, Toyota, apparently got the message: It announced last week it would ramp up its investments in North America. Last year, only eight companies in the S&P 500 cut their dividends, and only two suspended them outright, while 285 firms raised them. Many executives think corporate dividends will grow faster than earnings this year. In GM's case, both are going in reverse.
Saving for College? Prepaid Plans Just Got Much Better
Prepaid tuition programs are something like traditional pensions for college savings: The plan makes all the investment decisions for you and takes on all the risk. By contrast, other college savings vehicles like 529 accounts make parents do all the heavy lifting. So why aren't prepaid programs more popular? In two words, financial aid. Currently, every dollar you save for your child in a prepaid plan reduces his or her financial aid eligibility dollar for dollar. But an obscure provision tucked away in the deficit-reduction bill President Bush signed last week will change all that. As of July 1, prepaid plans will enjoy the same beneficial financial aid consideration that 529 plans and Coverdell accounts do. In other words, money in a prepaid plan will be considered a parental asset. And for aid purposes, less than 6 percent of parental assets is expected to be used for college bills. Says Joseph Hurley, founder of Savingforcollege.com: "This will absolutely increase the attractiveness of these prepaid plans."
Here's One Tax Washington Can't (or Won't) Fix
Taxpayers looking for permanent relief from the dreaded alternative minimum tax won't find it this year. Instead, the president's budget proposal assumes Congress can put another temporary "patch" on the AMT system. Of course, if Congress can't, millions of middle-class taxpayers will be hit with this so-called stealth tax. The AMT was enacted in 1969 to ensure that wealthy taxpayers paid their fair share, but because it wasn't indexed for inflation, middle-income taxpayers have been swept into the system. Congress increased the AMT exemption, but that fix expires in 2006--unless Congress extends it.
The Week Ahead: Bubble Bursters; Prices of Interest
Bubble Bursters
Contrary to popular belief, financial bubbles burst not because demand for highflying assets dries up but because suppliers flood the market. If that's the case, home builders, not home buyers, will determine whether the housing bubble bursts or simply slows down. The good news is home builders are already adjusting to the changing marketplace. In December, housing starts fell 9 percent, marking the second drop in the past three months. This week, the government will report whether growth in the supply of new housing continued to shrink in January. There's a good chance that it did. Last week, Toll Brothers, a leading home builder, reduced its forecast for the number of homes it thinks it will deliver in 2006, citing "softening demand." And the National Association of Realtors predicts housing starts this year will decline by more than 9 percent.
Prices of Interest
Will new Federal Reserve Board Chairman Ben Bernanke raise interest rates in March? A lot will depend on the next producer price index report, due out Friday. While wholesale prices jumped more than 5 percent last year, core inflation remains under control--at least so far.
ON THE RISE?
Producer price index
[labels] 4.1 pct. 6.9 pct. 5.4 pct.*
1 2 3 4 5 6 7 pct.
Jan. 2005 May Sept Dec.
*Change in wholesale inflation over prior 12 months
Source: Labor Department.
This story appears in the February 20, 2006 print edition of U.S. News & World Report.
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