How Is Big Business Using the Trump Tax Cut? What We KnowBy
Capital spending, worker pensions, deals, dividends top list
Apple is vague, still weighing what to do with $163 billion
President Donald Trump’s corporate tax cuts are already having a big impact.
The main takeaway at the halfway point of earnings season is that corporations are going to make more money -- lots more -- as their statutory tax rate gets axed to 21 percent from 35 percent. Corporate chiefs already are making plans for the windfall, with some detailing specific investments in infrastructure or technology along with their one-time charges and benefits.
So far a record 75 percent of companies have raised their profit guidance, according to strategists at JPMorgan Chase & Co. Taking into account the benefits of lower corporate taxes, Wall Street expects U.S. firms to increase capital expenditures by as much as 6.8 percent this year -- more than five times the projected growth in 2017.
There are other needs too beyond capital spending: Higher pay for workers in a tight labor market, balance-sheet repair and returns to investors through buybacks and dividends. Many of the big announcements so far represent multiyear plans with big headline numbers but only broadly sketched details.
Citing the lower tax rate, AT&T Inc. said free cash flow this year will surge almost 20 percent to $21 billion, giving the phone carrier more financial flexibility.
The telecom giant had already announced it would invest an additional $1 billion in the U.S., helping the company prepare for the transition to a new fifth-generation mobile network, and give $1,000 bonuses to workers, thanks to reforms that Chief Executive Officer Randall Stephenson called “capital freeing.”
Chief Financial Officer John Stephens also made clear the company sees reform strengthening AT&T’s financial position. “We see a significant boost to our balance sheet, reducing $20 billion of liabilities and increasing shareholder equity by a like amount,” he said last week on a call.
Lockheed Martin Corp., the world’s largest defense contractor, is earmarking some of its expected windfall for pensioners. The company plans to contribute $5 billion in cash, satisfying its required obligations until 2021.
The company is also increasing its commitment to initiatives like employee training, charitable contributions for education in science and math, and the Lockheed Martin Ventures fund by $200 million, CEO Marillyn Hewson said on a call.
Lockheed projects earnings will more than double this year to $15.50 a share, buoyed by
the U.S. tax cuts and higher deliveries of its F-35 Lightning II fighter jet.
Merck & Co. expects its tax rate will fall to about 20 percent from 35 percent, providing added flexibility for major capital expenditures, in addition to research and development.
The drugmaker expects to spend $12 billion over five years, including $8 billion in the U.S., with oncology, vaccines and animal health targeted for investment, CFO Rob Davis said on a call. Merck will also pay one-time bonuses to some of its 69,000 employees.
Priorities also include the dividend, business development deals and repurchases, to the extent possible.
Merck finished the year with $21 billion in cash, and plans to repatriate about $17 billion over time. The proceeds will be invested in the company, its dividend, and remaining money will go toward deals and share repurchases.
AbbVie Inc., maker of the top-selling drug Humira, plans to spend $2.5 billion on capital projects in the U.S. as a result of tax reform and is evaluating expansion of its U.S. facilities, according to CEO Richard Gonzalez. The drugmaker also will accelerate pension funding by $750 million and increase non-executive pay, though it didn’t provide details.
AbbVie said on Jan. 26 its tax rate will plummet to 9 percent this year. It was 19 percent in 2017. As a result the company boosted its annual profit guidance to as much as $7.43 a share, a 13 percent jump.
“U.S. tax reform enables more efficient access to our foreign cash, and the ability to deploy it in the United States,” Gonzalez said on the call.
Banking on Windfall
Lower tax rates may boost annual profits at the five largest U.S. banks by more than $10 billion, based on what they’ve paid over the past three years. JPMorgan, the biggest corporate taxpayer after Apple Inc., said it’s developing a plan to benefit employees and customers that may include subsidies for lower-income borrowers and help for small businesses.
Bank of America Corp. Chief Executive Officer Brian Moynihan said the “vast majority” of the benefits will go toward returning capital to shareholders, while Citigroup Inc.’s Michael Corbat said the lower rate would help the firm make good on a pledge to pay out $60 billion over several years. Wells Fargo & Co. boosted its minimum wage and charitable giving.
There are some speedbumps before the benefits of the lower rate accrue. Morgan Stanley took a $990 million charge in the quarter related to the U.S. tax overhaul, and Goldman Sachs Group Inc. said the short-term hit to its capital from taxation of retained foreign earnings meant it would slow buybacks in the first half of this year.
Roche Holding AG’s tax rate will drop from 26.6 percent last year to the low 20 percent range. The tax cut means core earnings per share will rise by a high single-digit rate this year; without the reduction, earnings might have been little changed. The drugmaker didn’t announce any increase in investment.
“We do benefit from the U.S. tax reform,” Severin Schwan, CEO of Roche, said in a conference call. “We have been one of the biggest taxpayers in the United States.”
Diageo Plc, British American Tobacco Plc and Societe Generale SA also said the tax law would lower their rates. Lenovo Group Ltd. posted a surprise loss after taking a $400 million charge related to the tax-law changes, while adding that its U.S. operations may benefit from a lower rate in the longer term.
The Big Gorilla
The company with the biggest decision to make is Apple with a net cash position of $163 billion -- the sum of its $285 billion cash hoard and debt of $122 billion. Apple’s aim is to reduce that to zero and will announce more specific plans when it reviews results for the current quarter ending in March, Chief Financial Officer Luca Maestri said on a call.
“When you look at our track record of what we’ve done over the last several years, you’ve seen that effectively we were returning to our investors essentially about 100 percent of our free cash flow,” Maestri said. “And so that is the approach that we’re going to be taking.”
Last quarter, Apple paid $3.34 billion in dividends and repurchase more than $10 billion of its stock.
The company had no difficulty financing acquisitions before tax reform, he said, and doesn’t see any now, either. Apple made 19 acquisitions last year.
“It’s always the customer experience in mind, right, that we make acquisitions,” Maestri said. “We look at all sizes and we will continue to do so.”
— With assistance by Jing Cao, Mark Gurman, Blaise Robinson, Jared S Hopkins, Julie Johnsson, Caroline Chen, Brandon Kochkodin, Phil Serafino, Scott Moritz, Dakin Campbell, Hugh Son, and Laura Campbell