What Corporations Did With Their Tax Cuts

There were a few major topics identified when we first set out to analyze the effects of the 2018 tax bill. The link to the original post can be found (here).

One major topic was how corporations would handle the extra cash coming their way. One year out, we have some evidence as to know their behavior. A recent Bloomberg story identified analysis by Citigroup that showed corporations have spent more on stock buybacks than on capital expenditures (story here). This is the first year since 2007 that this has happened. 

We mentioned in our original post how wages, stock buybacks, dividends, and capital expenditures would show the intentions of the executives of US corporations. Here is some data

- Wages grew 3.2% in 2018. That is the highest annual gain in a decade. CNBC story here.


- Stock buybacks increased to over $800 billion. That is an increase of 60% over the 2017 total of $500 billion. This happened with a stock market that ended the year 5% to the downside. (Bloomberg)

- Capital Expenditures increased $100 billion from $600 billion to $700 billion.  (Bloomberg)

- Dividends increased 10% to $450 billion from $400 billion in 2017 (Bloomberg)

These numbers tell a strong story about how corporations used the extra revenue from the tax cut. It is not a healthy story. A higher than normal percentage was dedicated to buybacks. On the one hand, having that as the reason for rising earnings and stock prices is not a long term recipe for success for investors. Corporate America used the tax cut to buyback stock to boost earnings per share that inflated bonuses while wage growth was a paltry 3%. On the other hand, it is positive news for all those execs whose bonuses are tied to earnings. It also stemmed the slide in the stock market.

Corporate America needs to take the infrastructure opportunity coming and invest those tax dollars in its employees and products.  


** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

Two Tax Cut Views From The Wall Street Journal

by Michael Keane


As we continue to analyze the results of the tax cut, a curious thing happened. The Wall Street Journal put out conflicting articles on the subject. In one recent article this week written by Richard Rubin and Theo Francis (link here), the amount of money that has been repatriated by US corporations due to the changing tax law is currently at about 20% of the Trump Administration's expectations. This is presenting (or compounding) a higher risk for the US deficit in the next few years. But in an Opinion piece (link here) by Stephen Moore, the analysis is that the corporate tax cut is quickly and assuredly going to pay for itself and then some through GDP growth.

One of the areas that the US government expected to help nullify the hike in the deficit was corporate profit repatriation. If you follow the evidence presented in the first article, and current levels of repatriation continue, the government will not be able to deal with the deficit.If you follow the second article, the rise in GDP will do more than enough to cover the deficit initially created by the cut and overtake the issue of repatriation.  

Because the opinion piece came after the repatriation article, and filled with scattered non-evidence based data points, it might lead one to believe it was written as a rebut. But as always, time will tell where the Trump administration's economic decisions lead. In a thankful way, the decisions and moves have been big, so the results continue to be clearer.

KeaneVCC continues to follow this topic. Previous posts can be found here. 



  ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

Effects of Tax Cut Are Emerging

We are 6 months into the new tax structure. Results are starting to emerge in terms of what corporations and individuals are doing with their new tax savings. A series of blog posts was written about possible results earlier in the year. They can be found individually below:

- Part 1 - Likely Outcomes

- Part 2 - Corporate Responses

- Part 3 - Earnings

- Part 4 - Debt Load

Former Federal Reserve Chairman Ben Bernanke recently wrote an article on the topic. The link to the Bloomberg article is here. 

There are some items that are becoming clearer now that the second quarter is coming to an end.

- Cap Ex is losing the battle against buybacks and increased dividends
- Earnings have increased, supporting stock prices
- Debt load is not looking to decrease
- Because the decision making of how the tax bill benefits would be distributed was given to the top, the advantages up to this point are clearly staying at the top.

  ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

 

Part 4 - The Debt Load of the Tax Bill

by Michael Keane

Part 4 of the series on Likely Tax Bill Outcomes will focus on the debt load increase that has been created by the bill. There is a correct feeling of danger towards the idea that this will add over $1 trillion to the nations debt without a backstop or plan if the debt does not look to be paid off after a couple of years. If this is the case, it will be just another unfortunate financial burden that the Boomer and X generations (I am considered part of Generation X) will put on Millenials and beyond.

There is an ideology that the tax benefits from the increased profits from both corporations and individuals created will more than cover the current debt that has been saddled on the taxpayers. While this may sound like a probable process, greed and envy tend to get in the way of the plan. The likely scenario will be much different than this. Previous similar actions have been met with less capital expenditures and higher dividends to investors from corporations. Individuals that receive the most financial benefits will likely save and not spend the majority of their tax bill savings. There is also the issue of rising rates which will reinforce the issuance of dividends and increase savings.

This tax bill could not come at a more peculiar time. The Federal Reserve is about to start unloading their massive balance sheet. The administration is presenting a budget that increases spending. Adding all three actions up at the same time does not sound like good fiscal planning. The securities markets are going to need time to digest this action. You can look for ten year interest rates to continue to climb north of 3 percent in the next 6-12 months. If it moves quickly, ripple effects will be felt in the stock market and the economy as a whole.  It is strange that Republicans who champion the idea of fiscal conservatism are in charge. These actions on the tax bill clearly show that regardless of party, fiscal responsibility has some serious blinders on. It's kind of a bummer.

You can find the links to parts 1-3 below:

- Tax Bill Likely Outcomes (Part 1)

- Corporate Responses to Tax Bill (Part 2)

- Here Come The Earnings (Part 3)

 ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**



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Here Come the Earnings (Part 3 of Tax Bill Outcomes)

by Michael Keane

This is Part 3 of the "Tax Bill Analysis" series. It will focus on the support it will create for corporations earnings levels and the stock market as a whole. Please read parts 1 (link here) and 2 (link here) if you haven't already.

The recent tax is about to show its true worth to the economy. That is because it is about to show up on the balance sheets of US corporations. The first earnings cycle is going on in report after report, the one common theme is how much better earnings will be because of this new tax bill. From the banks like JP Morgan or Bank of America, to energy companies like BP or Shell, to tech companies like Apple or Microsoft, this bill is one big windfall. This one of the main reasons why corporations spent millions of dollars lobbying for this bill. It literally means billions of dollars for them and their shareholders. Per disclosure, through retirement funds and partners, some of KeaneVCC's money is invested in shares of these corporations.

This buffer or ignitor for earnings also will have an effect on the market as a whole. PE, or Price to Earnings ratios will drop because of the raised earnings. This puts stock prices at a cheaper level in terms of value. It could either send the market higher, or at the very least buffer any normal drops or corrections seen in the market.

 ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

Corporate Responses to Tax Bill (AT&T, Wells Fargo)

by Michael Keane

This is part 2 of a series on the Tax Bill Likely Outcomes. A link to Part 1 is here.

When the tax bill was announced, both AT&T and Wells Fargo made announcements of employee bonuses and minimum wage level increases. Slowly but surely, other companies have made similar announcements. While this is good, it isn't a coincidence that AT&T and Wells Fargo were the first to show their support for the tax bill. There are some things missing in these announcements that cloud the meaning of the message and need to be addressed before a conclusion of corporate analysis when it comes to the tax bill.

Both AT&T and Wells Fargo currently have direct interests in the government. AT&T is going through a monster merger. Wells Fargo is currently going through legal troubles with the government. For both companies to get announcements out to show their favor of the government's new tax bill is not surprising. Both companies have also spent a lot of money (like other companies) on lobbying for the tax bill. With the way that this administration works, having these companies make these announcements right after the bill passes was not coincidence at all. It was likely a calculated decision in order to curry favor with the administration so that the government will be influenced in their decision making. The companies already had the amount of cash needed to cover the bonuses and the higher minimum wage.

Another area of compensation that has not been addressed publicly by the companies is executive bonuses. Because of the tax bill, earnings will likely be higher. Because executive bonuses can be tied to earnings and stock prices, the likelihood that executive bonuses will be at the highest level of the expected range is very strong. These bonuses will probably dwarf those actions the companies have made for the rank and file. But you won't see voluntary press releases for this. When you combine that the lower personal tax rates, you can get a decent idea as to why so much money went into lobbying for this bill.

As time progresses, take a look at executive bonuses, corporate infrastructure spending, and labor wages through earnings reports. This will tell you if the companies are reflecting their true intentions in terms of their tax bill promises. Only then can we fully understand what the true position of the companies in regards to the tax bill actually are and act accordingly.

**Disclosure - Both KDK Fund and KDK Options (partners of KeaneVCC) have had stock or options positions in AT&T and Wells Fargo in the past. There are no current holdings of either company.** 

 ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

Tax Bill Likely Outcomes

by Michael Keane

Now that some of the dust has settled on the new tax bill, one outcome that existed before the bill looks to be at least the same if not expanded because of the bill. Due to behavioral habits of compensation and spending, the ability to move up economically has probably been weakened by the bill. The disparity of the economic classes will likely be more apparent and more difficult to traverse. This is part 1 of a series and will provide a general outline of the forthcoming posts to support this view on the subject.

Forthcoming posts include:

1)  What was and was not included in the press briefings by AT&T and Wells Fargo after the tax bill was announced; specifically their government interests

2) How both cash and debt levels for corporations and individuals that were already at historic levels will likely continue to grow;

3) How the stock market will now be cheaper on a EPS PE basis due to the tax bill which could propel it even higher; creating higher bonuses for executives.

4) How the debt of this bill will likely go unpaid by the increase in GDP and current young generations will have to pay it back while current adult affluent groups enjoy the benefits.

Examples and data will be presented in each of the following posts.

Only time will tell if this analysis has any level of correctness.  This troublesome bill feels like a quick thank you to the president and not a bill born and solidly made through careful analysis and thoughtful integration. The bumps for labor cannot be one-offs. Otherwise the legacy of this bill will not shine down favorably.