Now that the Senate has passed a tax bill and President Trump has signed off on it, investors should get ready for a few significant changes that are likely to begin happening. While the bill has been touted as a way to boost the economy and help the middle class, some economists disagree; mainly on the idea that if corporations have a lower tax bill, they will higher more workers and pay their current employee’s more money.
History has shown that when repatriated money comes back to US soil, it is largely used for share buybacks. In 2004 there was a one-time tax holiday when repatriation of foreign earnings was brought back home and taxed at a rate of 5.25%, not the usual 35%.
In 2004 fifteen companies brought back $155 billion, of the total $312 billion. Those 15 companies increased their share repurchases by 38% between 2005 and 2006. There was a clear correlation between share buybacks increasing the repatriation of overseas cash.
(Dividends are also likely to be increased but perhaps not at the same rate at share buybacks since dividends will be taxed and reducing share counts is an easier way for management to make their business look more appealing from a growth and financial standpoint.)
Top management at The Home Depot (NYSE:HD) has essentially told investors this much already. The company’s CFO Carol Tome stated during its last conference call “If it were to happen in 2019, we might use the tax — cash tax savings to invest in the business and then use — generated cash to back buy shares, it’s all fungible.” (per The Intercept.com)
This is a clear indication that at least one (and likely others), major corporation isn’t thinking about hiring more employee’s, paying their current employee’s more money or changing their current long-term capital investment plans. Which, means if they find themselves sitting on a huge pile of cash, it's likely going to be returned to shareholders in some form or fashion.
So, let’s take a look at some of the Exchange Traded Funds you can buy today which will give you exposure to some of the companies that could see increased share buybacks in the coming year.
The first and most obvious is the PowerShares Buyback Achievers Portfolio ETF (PKW). This ETF holds U.S. based companies that repurchased at least 5% of their outstanding shares in the previous 12 months. The firms in this fund have already shown investors they are dedicated to buying back their own stock when they have available cash. Why would do something different if they received a huge tax break on foreign earnings or a year-end tax break?
PKW has been around since 2006, currently has a 0.63% expense ratio, owns 221 stocks, offers a yield of 0.64%, $1.36 billion in assets under management and tracks the NASDAQ Buyback Achievers Index very closely.
Another option would be the iShares U.S. Dividend and Buyback ETF (DIVB). This ETF tracks an index of large, medium and small capitalization U.S. stocks which historically pay dividends and buy back their own stock. Again, the management teams in place in these companies are historically shown investors that they will return excess capital rather than spend it on growing the business.
This is a new ETF with an inception date of just November 7th, 2017. One could assume the folks at iShares think the new tax laws may help the stocks they buy for this fund. The top holdings are currently Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ), JPMorgan Chase (NYSE:JPM), and Exxon Mobil (NYSE:XOM).
All five of the companies that make up DIVB’s top five holding derive a large amount of their revenue from overseas, making them great candidates for a large buyback or dividend once repatriated money comes home. That sort of thinking leads to me the next ETF, the Technology Select Sector SPDR Fund (XLK). The XLK tracks an index of the S&P 500’s technology stocks. The thinking here is that most technology stocks are also large multination’s. The tax repatriation part of the new tax bill will likely push some if not all of these technology stocks into bringing back cash and again possibly forcing management to increase dividends and share buybacks.
Technology stocks, of course, are not the only companies that have foreign revenue. Consumer staples, industrials, energy, nearly every industry now has multinational exposure. The technology ETF was simply an example of a back-door type of investment into the buyback movement which may have not yet seen its price increase due solely to the idea that buybacks are coming. For example, while PKW is up 6.41% over the last month, XLK is actually down 0.13% during the same time-frame.
Investors need to be ready for large buybacks and dividend increases in the future as corporation’s experience lower taxes and a favorable environment for foreign earnings.
Disclosure: This contributor held long positions in Apple, Microsoft, Johnson & Johnson and JPMorgan Chase at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.