It's something that hasn't been done in almost two
#-ad_banner-#In an attempt to ease the economic hemorrhaging
from a recession that's lasted nearly eight years, Puerto Rico
passed a balanced budget earlier this month. The rare feat was a
sign of hope for the U.S. protectorate as it attempts to whittle
down its $70 billion in public debt, lower an unemployment rate
hovering near 15% and stave off a "brain drain" that's seen over
450,000 people flee the tiny Caribbean island.
What does this all mean?
Simply put, it means Puerto Rico is setting up to be an
incredible investment opportunity and tax haven for U.S.
Let me explain...
Hedge fund billionaire
-- known for his $15 billion bet against subprime mortgages as
the financial crisis hit -- says Puerto Rico could be the next
"Singapore of the Caribbean." His firm, Paulson & Co., is
investing $260 million this year in two upscale beachfront hotels
in San Juan, the commonwealth's capital. All told, Paulson is
expected to invest up to $1 billion in Puerto Rico by the end of
Puerto Rico is making all the right moves to spur economic
growth by attracting wealthy investors and businesses. Two recent
moves in particular are meant to entice outside investors --
namely, wealthy U.S. investors.
The first, known as the Individual Investors Act (Act 22),
states that new residents of Puerto Rico are completely exempt
from taxation on their capital gains, dividends and interest
The second, known as the Export Services Act (Act 20), levies
a top 4% tax rate on earnings from businesses that perform
services like consulting, asset management, computer programming,
research and development for clients outside of the island -- as
long as the company is based in Puerto Rico.
Hedge fund billionaire John Paulson says Puerto
Rico could be the next "Singapore of the
Now to get an understanding of why these two tax laws are so
attractive to U.S. investors, one must understand that Americans
couldn't typically take advantage of these sorts of situations.
If a U.S. citizen moves abroad, they are still taxed on their
income -- no matter where they earn it and no matter how long
they plan to live abroad.
So unless you were willing to go through the lengthy,
expensive and arduous process of setting up a foreign trust or
renouncing your U.S. citizenship, the rule of thumb has always
been that no matter where you live or where you earn your money,
you still have to pay taxes on that income... until now.
Because Puerto Rico is not quite a state and not quite a
foreign country, citizens of Puerto Rico pay taxes to the Puerto
Rican government, not the U.S. government -- yet they are still
considered U.S. citizens. Combine this with the new tax
incentives, and you have yourself a unique situation to legally
lower some of the U.S. tax burdens -- while still retaining your
It's clear that these incredible tax incentives should invite
a flood of capital and economic growth as wealthy U.S.-based
investors catch on -- and when you can get in on the ground floor
with some of America's wealthiest investors, you have the
potential to make enormous gains. So what's the best way to
invest in Puerto Rico?
One way I'll be looking to invest is in companies that
relocate to Puerto Rico to take advantage of the huge tax
incentives. Paying less tax means businesses can hang onto more
of their revenue -- which means more money to pass along to their
One company that's looking to invest more in its operations in
Puerto Rico is Arizona-based
Honeywell Aerospace (NYSE:
, a diversified technology and manufacturing company. Puerto Rico
is already home to Honeywell's aerospace unit, which produces a
wide variety of aviation products like turbine propulsion
engines, navigation, radar and surveillance systems and aircraft
A different investment that's more of a "pure play" as Puerto
Rico gets its feet back under it is
Banco Popular (Nasdaq:
, which provides a range of retail and commercial banking
products and services primarily to customers in Puerto Rico and
the United States.
The company is looking to divest a majority of its U.S.
branches to boost profitability and strengthen its ability to
repay a government bailout of $935 million. To help reduce
operating expenses, the bank will be focusing its U.S. retail
footprint in New York, New Jersey and Florida. It will also be
consolidating its operation centers, bringing about 200 jobs back
to Puerto Rico.
The effects of management's adjustments to cut costs and
increase revenue can be seen in the bank's most recent quarter:
Banco Popular posted net income of $86.4 million, up from a loss
of $120 million a year ago.
BPOP sports dirt-cheap valuation metrics, too. Its
price-to-book ratio is currently 0.7, meaning the stock is
trading for less than the value of the assets on its balance
sheet. Banco Popular's price-to-earnings (P/E) ratio is a
ridiculously low 3.9, with a forward P/E of 10.6.
Risks to Consider:
While Puerto Rico is making the right steps to recovery,
concerns about its economy remain. After all, eight years of
turmoil can't be resolved in a few months. Banco Popular is
definitely not for those who are risk-averse. While it is showing
improvements, it is wise to tread carefully.
Action to Take -->
Investing in Puerto Rico isn't for faint-hearted investors -- but
once the ball gets rolling and the "Singapore of the Caribbean"
begins to emerge, Banco Popular will likely be at the forefront,
serving as an engine of growth. As businesses, entrepreneurs and
capital flock to Puerto Rico, Banco Popular, the dominant player,
will likely be able to profit from the substantial increase in
banking activity and investments that come along with them.
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