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All Contents © 2018The Kiplinger Washington Editors
By James Brumley
| December 20, 2017
President Donald Trump’s tax agenda has finally been realized after months of talking. Sweeping GOP-crafted tax reform has been approved by the House and Senate. All that’s left is a signature from the president himself, and the bill will become law, going into effect beginning in 2018.
The conjecture is over. Now is the time to start hunting down the best stocks to buy to leverage what should be a massive corporate windfall.
The GOP's tax reform legislation is more or less what everyone was expecting. Tax rates for all income brackets have edged lower. The standard deduction for individuals jumps from $6,500 to $12,000; double that for married couples. The child tax credit is cranked up to $2,000 each, and the Affordable Care Act mandate goes away. Companies won big, too. The top corporate tax rate is now 21%, down from 35%, and internationally held cash – earnings made but kept overseas – can now be repatriated at a one-time rate of 15.5%.
Wall Street has been predicting this outcome for months, but with the asterisk of potential last-minute hurdles. Well, those roadblocks have been cleared. Americans now are free to think about how the tax changes will affect their pocketbooks, and what investments will benefit most from tax cuts.
Here’s a rundown of the 10 best stocks that investors can buy to gain from Republicans’ tax reform. The big upside for many companies is a sharp reduction in the amount of money they usually pass along to the federal government. But in some cases, additional benefits come into play.
Data is as of Dec. 19, 2017. Stocks are listed in alphabetical order. Click on ticker-symbol links in each slide for current share prices and more.
Biopharmaceutical outfit Amgen (AMGN, $176.87) stands ready to enjoy a double-pronged benefit of the Republicans' tax reform.
One of those prongs is a good, old-fashioned reduction in the amount of its income it has to fork over to the federal government every year. The bigger prong, of course, is being able to bring home its cash stashed overseas at a very low tax rate, as well as a gentler tax burden on future profits.
Amgen currently holds $39 billion in overseas banks, waiting for a less painful repatriation rate to fall in place, and roughly half of its revenue is driven overseas. Bringing it all back to the U.S. had proven too costly under the old rules, but now it isn’t.
CEO Robert Bradway already has made it clear what he plans to do with the money that can effectively be redeployed. He’s mulling some acquisitions and new drug developments. That said, Bradway also has mentioned using that cash to support dividend growth as well as stock buybacks, though acquisitions may ultimately provide a means of doing the former.
Add consumer technology company Apple (AAPL, $174.54) to the list of multinational companies that are apt to be big-time winners from sweeping tax cuts.
Apple has roughly $270 billion in cash and investments on the books, the vast majority of which (a little more than $250 billion) is stashed overseas. That’s money Apple has, until now, been unable to bring home without incurring a hefty tax bill.
Bernstein analyst Toni Sacconaghi feels the iPhone maker will make a big move with that war chest, and soon. Prior to the overhaul’s final approval, he explained to clients that the “Proposed US Tax Reform could be very accretive for Apple. The upshot is that proposed US Tax Reform could be very significant for the company. We believe Apple would likely repatriate all of its offshore cash.”
Meanwhile, with Apple mania still going strong, an extra couple thousand dollars in the average family’s pocket in 2018 should prod splurges on the hottest, most in-demand iPhone in the world.
More economic activity and bigger employee paychecks should drive more airline revenue, and greater demand for air travel should in turn bolster demand for aircraft. That’s good for Boeing (BA, $297.25) – the king of passenger jets and one of the best stocks of the past year.
That said, the need for new jets is only a modest part of the upside Boeing should see under the overhauled tax rules. Demand for new jets was already on the rise anyway.
Earlier this year, Boeing estimated that the air travel market would more than double by 2036, spurring demand for 41,000 new airplanes to meet that demand and replace aging fleets. If the simultaneous effects of corporate and consumer tax breaks take hold and start to grow the economy in a way that puts more money in everyone’s bank account, Boeing’s outlook may be realized sooner than guessed, and be bigger than foreseen.
There’s also the benefit of lower tax rates. CEO Dennis Muilenburg knows exactly what he would do with a bigger bottom line. He explained earlier this month, “First thing we’re going to do with the benefits of tax reform is we’re going to invest in innovation. We’re going to invest in capital, new product lines, it’s going to create more manufacturing jobs and our shareholders are going to benefit, too. We’re going to improve dividends, share repurchase. But No. 1 use of cash here is (to) invest in innovation for the future.”
That innovation in and of itself would make Boeing an even more potent and profitable planemaker, with or without greater plane demand.
CarMax (KMX, $67.85), which specializes in the purchase and sale of used cars, boasts 181 locations, so you’ve probably seen the company’s car lots somewhere in your city. What you may not fully appreciate is just how quickly this company is growing. A little more than a year ago, Carmax had only 158 units.
The company intends to continue opening stores at its present clip too, capitalizing on an environment where the purchase of newer-but-used cars still is the preference to new-but-unaffordable vehicles. While the actual amounts will vary, each family is expected to keep an extra $2,000 per year in the early stages of tax reform. That’s not exactly enough to make a new car feasible, but it does put a new used car within reach for most. The average monthly payment for a new car on a 68-month lease still is a hefty $479, or $5,748 per year.
There’s even more upside, though. The new tax rules benefit CarMax by allowing it to immediately deduct expenses related to purchasing or leasing new locations, and erecting new buildings to sell used cars.
While lower tax rates clearly will prove beneficial to all U.S. corporations, heavy equipment maker Caterpillar (CAT, $150.91) is apt to benefit more than most.
It’s complicated, but the upside of the new tax reform, in simplest terms, is that they encourage multinational companies such as Caterpillar (which does more than half of its business overseas) to bring profits back home by taxing them at a lower rate.
Make no mistake: This is a big deal.
You may recall that in March of this year, federal agents raided Caterpillar’s corporate offices, looking for evidence that the company was doing the very thing that’s allowed by the new tax rules. If the practice no longer requires corporations to push the legal envelope, the equipment manufacturer is going to hit the ground running at full speed once tax cuts are in place.
Courtesy Mike Mozart via Flickr
Charles Schwab (SCHW, $51.81) has had enough of the tax man. The online stock broker and banker has paid out a stunning 37% of its income in taxes over the course of the past five years, versus a rate in the mid-20% range for most other American companies.
That could change for the better very soon, though, for Schwab and its peers.
Credit Suisse analyst Craig Siegenthaler initiated SCHW at “Outperform” on Dec. 3, saying that Schwab is better positioned than its rivals to capitalize on looming changes not just in tax rates, but higher interest rates.
JPMorgan analyst Kenneth Worthington agrees, recently noting, “We see potential for SCHW shares to perform well around the higher interest rate outlook and growing bank assets. We expect Schwab bank asset growth to increase substantially with faster and larger transfers from money market fund assets to bank assets.”
The upside that carmaker Ford (F, $12.69) will experience under the new tax plan isn’t without controversy. For instance, the Senate added a provision into the bill that quelled a planned levy on profits driven by offshore factories, reversing an effort made by Trump just a few months ago by incentivizing Ford to develop more plants in Mexico.
Still, profits are profits to shareholders, no matter where they come from.
That said, Ford also is incentivized to build and keep jobs in the U.S. The new tax rules still favor domestic factory production by allowing for the full and immediate expensing of new equipment purchases. Ford makes more cars in America than any other outfit, so the impending tax cuts could make it very cost-effective to operate and export from here, and even allow Ford to undercut competitors overseas.
Lower corporate tax rates may help Ford more than any of its U.S.-based rivals, in fact. RBC’s Joseph Spak said at the beginning of this year, “We believe Ford is in a better relative position for tax reform. 72% of Ford’s NA production volume is in the US versus 62% for GM. Ford continues to indicate that it finds US tax reform ‘intriguing’ even if a border-adjusted tax is implemented. Most of what Ford sells in the US is made in the US; it exports high-value vehicles and imports low-value vehicles.”
The advent of the new tax rules are a perfect storm at the perfect time for Southwest Airlines (LUV, $65.92), as they allow for full capital expenditure deductions in the year they occur, and would dramatically lower the 36% tax rate that has crimped the company’s bottom line for too long now.
A bonus: With a little more more discretionary income at its disposal, the middle class (along with the income stratifications slightly above and below what qualifies as middle class) may finally fly to their next vacation destination rather than drive there.
CEO Gary Kelly already has big expectations for the expected savings and added business. Earlier this month, he opined before the proposal become a finalized law, “We’re pleased. Certainly it will be a benefit for the transportation industry, and certainly a benefit for Southwest Airlines. … I think that it would be good for the overall economy in terms of spurring growth, and in particular in terms of driving job growth.”
The low-margin retailing industry pays a massive tax bill relative to income. Unlike other arenas such as technology or finance, there’s just nowhere for retailers to hide when it comes to the IRS.
Chief among the market's best stocks that currently write big checks to the U.S. government is the world’s biggest retailer, Walmart (WMT, $98.80), which has been subject to an average income tax rate of 31.6% for the past five reported quarters. The average corporate tax rate in the United States is closer to 24%. In other words, the new rates created by the Republicans' tax legislation would make Walmart a significantly more profitable retailer.
While Walmart’s future is bright, it’s not just because the company is about to enjoy a corporate tax windfall. With more money in the hands of the nation’s middle class – Walmart’s sweet spot – the company has good reason to expect more traffic in its stores. CEO Doug McMillon flatly said of the then-impending tax overhaul in November, “I do think something is going to happen, and am optimistic that a lower tax rate for individuals and business will help spur the economy and drive more growth.”
Add those to the numerous reasons to be bullish about Walmart’s stock.
What’s more middle class than a fast-food cheeseburger? Not much, though even within the world of cheeseburgers, a little more pocket money translates into a more premium burger experience than the one McDonald’s (MCD) is trying to provide.
That puts smaller chain Wendy’s (WEN, $16.40) front and center as a beneficiary of Trump's tax reform – at a time when consumers were driving past grocers and into restaurant parking lots anyway. As of the middle of this year, American consumers now spend more money eating out than they do eating at home. The divergence is only apt to widen now that slightly higher incomes are in play.
There’s another mostly overlooked reason Wendy’s is particularly well-positioned to thrive when the middle class starts taking home bigger paychecks. Roughly 95% of its business comes from North America, with the lion’s share of that coming from the U.S., where the tax breaks are to be implemented. Rivals like McDonalds and Yum! Brands (YUM) – the parent of KFC, Pizza Hut and Taco Bell – are more heavily exposed to international markets.
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