Credit Suisse Chief US Equity Strategist, Jonathan Golub, has estimated that corporate tax cuts in the U.S. could boost average earnings of companies in the S&P by about 8-10%. Now, as those tax cuts get priced into the market for the 10th time today, we decided to take a look at which industries will benefit the most and how they will spend their extra cash flow.
Of course, as Jamie Dimon noted last week (see: Jamie Dimon Says Corporations Will Fund Buybacks With Tax Cuts And That's "Not A Bad Thing"), the bulk of the tax cuts, particularly in industries like pharma and tech that have large cash balances sitting over seas waiting to be repatriated, will go to shareholders via buybacks and dividends. The rationale is that U.S. companies are already sitting on a mountain of cash and borrowing rates are at historic lows meaning there are already very few hurdles to increasing investment.
"You need a competitive tax system ... companies will retain more capital and start to use it over time," Dimon said Wednesday in response to a moderator question at the Axios Smarter Faster Revolution event in Ann Arbor, Michigan.
"Some will raise wages. Some will buy companies. Some may do dividends and buybacks. Don't act like that is a bad thing. That is their money. Think of it as a QE4. That money gets recirculated in the American system."
Meanwhile, not all industries will be impacted equally. Companies with mainly US-based revenues, which are not hit by the new charge on overseas assets, will gain the most from the new code. Oil refiners, railroads, airlines and banks are expected to be among the biggest beneficiaries with companies like Valero, United Technologies and JP Morgan expecting an earnings boost of 15-30%. Per the Financial Times:
Other significant beneficiaries are likely to include oil refiners. The leading companies such as Valero Energy and Andeavor can expect earnings per share next year to be 15-32 per cent higher as a result of the tax cut, according to Guy Baber, an analyst at Simmons & Co.
For equipment manufacturers including United Technologies, Honeywell and Emerson Electric, the average boost to earnings would have been about 10 per cent if the main corporate tax rate had been cut to 20 per cent, according to Vertical Research Partners. That gain is likely to be only slightly smaller with a 21 per cent rate.
Banks are also expected to be significant winners. KBW calculated that earnings per share in 2018 would be about 20 per cent higher for JPMorgan Chase and 21 per cent higher for Wells Fargo under a 20 per cent tax rate.
As Bloomberg notes, retailers, even though they're not making much profit these days, will also be among the biggest winners of corporate tax cuts as many generate all, or at least an overwhelming majority, of their income in the U.S. Moreover, discount chains and consumer brands also expect the tax bill to boost demand as many of those companies rely on middle- and low-income shoppers for the bulk of their sales, and changes to individual taxes - such as doubling the standard deduction - will increase discretionary income.
Big Pharma and Tech, unlike the retailers mentioned above, have plenty of profits but they just happen to be sitting overseas. Of course, while the tax bill has been sold by Washington as a job creator, the reality is that drug companies and tech giants like Apple are more likely to return their money to shareholders, or use it to make acquisitions.
The homebuilding industry, and their influential swamp dwellers lobbying force, was able to minimize cuts to incentives for homeowners that it said would cause home prices to fall. The bill will allow interest deductions on the first $750,000 in new mortgage debt, down from the current limit of $1 million; the House had called for slashing it to $500,000. It also won back $10,000 in deductions for property taxes.
Alas, there are some 'losers' in Trump's tax bill as well. For example, roughly 30 colleges and universities, with more than 500 students and an endowment over $500k per student, may face a 1.4% tax on their endowment investment returns which will hit large universities like Harvard and Yale as well as small liberal arts colleges such as Amherst and Williams.
Meanwhile, several major sports colleges are also up in arms over the reversal of an obscure rule that allows their alumni and supporters to make tax-deductible contributions to their teams, in return for priority seats at football and basketball games. The provision has been credited with the financial boom in college sports over the past three decades. It seems that rich alumni will now have to purchase their box seats with post-tax dollars...oh, the horror!
Of course, this all presumes that the GOP's efforts to pass tax reform don't go the way of the Obamacare repeal courtesy of another last minute change of heart by John McCain...