Market Beat: Tax code changes would lead to cash repatriation
Will tax law changes lead to dividend increases and buybacks?
The stock market is a forward-looking mechanism. That means that current stock prices reflect assumptions about what will happen in the future like earnings growth.
The major stock market indexes have been on quite a bull run since the presidential election in November. The economy has been performing well since then, and corporate earnings have been rising.
The S&P 500 has hit a record high of 2,490.87, the Dow Jones Industrial Average has set a record of 22,179.11, and the NASDAQ has hit a new all time high of 6,460.84. Currently, the valuation of the market is higher than the long-term average. So, the market is anticipating economic strength in the future.
One thing that the market is expecting is some changes to the tax code. Currently, many major corporations hoard cash overseas because of the taxes that would have to be paid if the funds were to be repatriated.
According to Palm Beach Research, it’s estimated that $2.6 trillion dollars is stashed overseas right now. That’s larger than the GDP of the great state of California, which has the sixth largest economy in the world.
Corporations will be able to use those funds for any purpose they wish. It’s expected that a large percent of the money will be used for dividend increases and stock buybacks. Chuck Robbins, the CEO of Cisco has said, “We do have various scenarios in terms of what we’d do, but you can assume we’ll focus on the obvious ones; buybacks, dividends and M&A activities.” Cisco has more than $65 billion in overseas cash.
Cisco is just one of many companies with a large overseas cash hoard. Apple has about $230 billion, and Microsoft about $124 billion. The CEO’s of both companies have indicated that dividend increases and buybacks are likely if the corporate tax rates are reduced. Income investors will definitely look forward to that rising dividend yield.
There will probably also be an increase in merger and acquisition activities. In general, the anticipated changes will be very good for the market, but some of that is already priced in.
As with any legislative or regulatory changes, we’ll have to wait and see what the actual proposal is and then follow the process to see what gets approved. Congress can create some market volatility when they begin debating issues like this.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.