Donald Trump ran his Presidential campaign promising to make many changes to the tax code and how Wall Street is governed. Now that he has been elected, the question is whether he will be able to get his tax plan through Congress in its current form and what the impact of this plan will be on both the economy and the common Joe investor.
One of Trump’s promises is to allow a one-time reduction in tax for companies to bring back their repatriated profits that they hold overseas and buy back shares of their own stock. Goldman Sachs is predicting that this would lead to an unprecedented level of stock buybacks among major corporations. (For more, see: Stock Buybacks: Breakdown.)
Trump has stated that the one-time reduction would reduce the tax rate on any repatriated funds that are brought back to the states from 35% to 10%. Goldman Sachs has stated that this will most definitely give companies incentive to do just that and is predicting that for the second time in the last 20 years, stock buybacks will constitute the biggest share of cash used by companies in the Standard & Poor’s 500 Index.
The investment bank estimates that stock buybacks will rise by 30% to about $780 billion in 2017. In its research report, it states, "We estimate that $150 billion out of $780 billion of S&P 500 buybacks in 2017 will be driven by repatriated overseas cash. We forecast that S&P 500 companies will repatriate close to $200 billion of their $1 trillion of total overseas cash in 2017, which will be directed primarily toward share repurchases."
Moody’s Investor Services has also stated that Apple Inc. (AAPL) is on course to bring back $230 billion in overseas cash by the end of 2016, which dwarfs the amounts being brought back by any other company. Microsoft Corp. (MSFT) comes in a distant second, bringing back $113 billion, followed by Cisco Systems Inc. (CSCO) at $62 billion. Behind them comes Oracle Corp. (ORCL) at $52 billion and Alphabet Inc. (GOOGL) at $49 billion. A UBS research report reveals that other companies that have substantial cash held overseas include Amgen Inc. (AMGN), Medtronic (MDT) and Gilead Sciences (GILD) as well as Johnson & Johnson (JNJ) and Coca-Cola (KO). (For more, see: 4 Reasons Why Investors Like Buybacks.)
These companies may follow suit with the others in bringing substantial amounts of cash back to this country if Trump is able to get his tax break for them through Congress. And Goldman Sachs is betting that Trump will be successful in this endeavor. In its research report it states, "The probability of significant legislative activity has increased as a result of single-party control for the first time since 2010, and Republican single-party control since 2006. In addition, tax reform appears to be prominent on the policy agenda in 2017. We expect to see initial tax reform proposals around March or April and possible enactment during the second-half of the year."
The Bottom Line
If companies are indeed able to receive a lower tax rate on the cash that they bring back, the stock buyback programs that they implement could have a substantial impact on investors. Trump is very serious about trying to spur economic growth in this country, and this is just one of the ways in which he intends to try and make this happen. Having Republican majorities in both the House and the Senate means that he will have the wind at his back when he introduces his bill to Congress, and he may well be successful in getting this measure passed. The net result could be big profits for investors who hold the stocks of companies that bring their money back to America. (For more, see: Impact of Share Repurchases.)