Tax Bill: Corporate Winners and Losers

We moved one step closer to the passing of a tax bill last night, when Republican House and Senate leaders reached an agreement on a compromise bill to be put before both chambers of Congress. It is a sad commentary on the modern world, but what most people think of the plan as it stands probably depends more on where they get their news than on any objective reading of the facts.

Still, whether you see it as a massive handout to corporations and the wealthiest Americans or a much-needed reduction in the overall corporate and personal tax burden in the country, there are some changes that will directly affect companies and they can be quantified to determine the biggest potential winners.

The first thing to consider is that a cut in the corporate tax rate only benefits companies that pay tax, that is, those that make money. That somewhat obvious caveat aside, the biggest differentiator will be the effective tax rate, what percentage of a company’s income it pays in tax after all deductions and tax breaks.

That number varies considerably by sector and industry. According to a 2016 U.S. Treasury analysis, the highest effective tax rates are in construction and retail, at twenty seven percent, while the lowest is in utilities at ten percent. It would make sense, therefore to look for potential corporate winners in the retail and construction industries.

Retail, however, faces other problems than tax. The troubles of the industry have been well documented, and aren’t about to change soon. Consumer behavior is shifting, with e-commerce, although still relatively small as a percentage of total retail sales, growing rapidly. That has had a negative effect on those slow to see the change, but online retailers such as Amazon (AMZN) have caused another change that affects every retailer; margins are getting squeezed by consumers with much greater access to price information.

So, that leaves us with construction, and there is an additional provision in the bill that would benefit companies in that industry over the next few years. From next year on, companies will be able to deduct all the cost of equipment immediately, an obvious benefit to the equipment heavy construction industry. The other major beneficiary of that change will be the equipment suppliers, so don’t overlook stocks like Caterpillar (CAT) as major beneficiaries of the bill, but construction, as a high tax payer, looks to be the biggest winner of all.

There are other high tax industries with large capital expenditures that will benefit from the combination of nominal rate cuts and accelerated deductions. Most notable among them are airlines, who also benefit from generalized growth, so they should be considered too.

On the negative side, there are industries that suffer, at least in a relative sense. Credit Suisse, as reported here, researched which twelve companies would be paying the highest effective tax rate if the bill becomes law. Interestingly, eight of the twelve are in just two industries, healthcare and energy, so those are sectors to be avoided, nor do utilities, both as a defensive play and a low effective tax rate industry look like a good place to be.

There is still a possibility, albeit small and shrinking, that this compromise bill will still fail. In that case, stocks in general will undoubtedly sell off considerably, but with the bill coming up while the Republicans still have a 52-48 majority and with key Senators such as Maine’s Susan Collins on board, that looks unlikely.

It makes sense, therefore, to look for the best sectors and stocks to be in when the bill passes. Construction, air transport, and some manufacturers will be the biggest winners, so investors should tweak their portfolios to reflect that.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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