Congress (iStock photo)
The markets may be trading at all-time highs, but a new catalyst for additional stock returns have just emerged. And there’s now the question of whether investors have appropriately priced in the effect of the extra cash corporations will benefit from, particularly from the standpoint of cash repatriation among large-cap Tech.
Because of the current tax rate, some of America's largest corporations such as Apple (AAPL), Microsoft (MSFT), Cisco (CSCO) and Oracle (ORCL) have build massive stockpiles of cash offshore. Apple, Microsoft and Cisco alone have a total of $427 billion stored overseas.
According to The Institute of Taxation and Economic Policy, almost $800 billion in U.S. federal income taxes are being avoided by Fortune 500 corporations holding “permanently reinvested” profits in overseas tax havens, estimated to be worth $2.6 trillion. But these companies face a massive tax should they bring that cash home. The U.S. government levies a 35% tax rate on repatriated cash, which is a much higher rate than most corporations currently pay.
As it stands, almost $1 trillion in overseas cash and marketable securities have been stashed by the top 50 S&P 500 companies, marking an increase of almost $120 billion from the prior year. In lieu of using that cash, business executives have resorted to borrowing cheap money to fund their operations and, in some cases, M&A activity.
Apple CEO Tim Cook said in December 2015 that he would "love to" repatriate the funds, but he can't because "it would cost me 40%." The 40% refers to what Apple would owe in combined U.S. federal and state taxes. But assuming corporate profits held offshore can be brought back at a one-time tax rate of 10%, CFO's may no longer need to get financially creative.
Trump's plan states that "It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent."
Following a number of last-minute changes, Senate Republicans early Saturday passed a bill overhauling the federal tax code, known as the "Tax Cuts and Jobs Act.” Among the major revisions, an expansion of the estate tax exemption, the standard deduction for personal taxes would double and the Obamacare mandate would be eliminated.
These measures, which includes an estimated $1.4 trillion in tax cuts, were agreed upon by Senate Republicans via a vote of 51 to 49. Citing worries it would expand budget deficits, Bob Corker of Tennessee was the only Republican who voted against. Calling it an unacceptable giveaway to wealthy individuals and corporations, no Democrats supported the legislation.
Nothing is definitive yet, however. What follows next is that the bill must now go to conference to be reconciled into a single piece of legislation which requires the signature of President Trump, who during his campaign for the White House, made the tax overhaul a centerpiece of his economic policy goals. There’s hope that Trump will sign the bill before Christmas. GOP leaders are confident that this tax overhaul — described as the most significant change to the tax code in more than 30 years — can become law.
What stood out for me, as an investor, is that corporations would now see tax rates of 20%, down from 35%. The lowered tax rate has the potential to push 2018 earnings-per-share estimates higher. With the curtain on 2017 slowly dropping, it raises the question: how much of this tax reform — assuming it does becomes law — the market is still discounting?
Another thing to consider is that this tax reform would give corporations more flexibility in terms of their cash flow thereby — in some cases — eliminating the need to go the debt market or issue more shares to raise cash, while helping corporations adhere to their stated policies of returning cash to shareholders through dividends and stock buybacks.