The Biggest Winners From Trump's New Tax Law

By Justin Brill

Saturday, January 27, 2018

The surge continues for banks and financial stocks...

Since President Donald Trump's election in November 2016, the financial sector – as tracked by the Financial Select Sector SPDR Fund (XLF) – has crushed the overall market. As you can see in the following chart, financials have gained almost 50%, compared with a little more than 30% in the S&P 500 Index...

These companies have benefited from an improving regulatory environment and rising interest rates. This trend likely has further to run... But you may not realize it by recent headlines in the financial media. You see, many of these firms reported big profit declines this month as fourth-quarter earnings season kicked off...

For example, JPMorgan Chase (JPM) reported earnings of $4.2 billion, compared with $6.7 billion in the fourth quarter of 2016. Bank of America (BAC) said earnings were nearly cut in half, from $4.5 billion to $2.4 billion. Goldman Sachs (GS) lost $1.9 billion, compared with a net profit of $2.3 billion. And Citigroup (C) suffered a massive $18.3 billion loss – one of its largest quarterly losses in history – versus earnings of $3.6 billion last year.

All told, the financial sector reported a $29.2 billion quarterly decline in net profit, according to market-data firm FactSet Research Systems (FDS). And it was the only sector in the S&P 500 to suffer a year-over-year decline in earnings last quarter.

What's going on here?

It has to do with Congress' new tax law. First is something called "deferred tax assets."

During the financial crisis, banks suffered massive losses from bad bets on mortgages and other debt instruments. While these losses were terrible for shareholders at the time, there was a "silver lining" of sorts... Under U.S. tax law, the banks could convert those losses into credits to offset gains and lower their taxes in the future.

As we've discussed, the new law slashed the corporate tax rate from 35% to just 21%. This is good news for most U.S. companies, including financials. But it has an unusual consequence for these firms...

Because the top corporate rate is now significantly lower, the value of those tax credits is now lower, too. According to generally accepted accounting principles, these firms are required to write down the value of these credits, creating a "loss" in the process. As Bloomberg columnist Matt Levine explained last week...

Oh sure if you look at Citi's financial statements, you will see $23 billion of taxes, but it is not like Citi wrote a check to the Internal Revenue Service for $23 billion in December.

Instead, most of that number came from an abstract adjustment to an abstract accounting notion: Citi lost a bunch of money in the past, and it can use those losses to offset its taxable income in the future, and it treats those future offsets as an asset (a "deferred tax asset") on its balance sheet, and when the recent Tax Cuts and Jobs Act reduced the corporate tax rate, the value of those offsets went down, and so Citi had to write down that asset. Even though Citi's future taxes will actually go down, not up.

The tax bill will give Citi more money, but Citi has to account for it as a loss. It is a pure accounting oddity, a set of conventions that produce, in this particular case, a result that is at odds with economic reality.

Some of the big banks are also taking charge-offs related to cash held overseas. That's because the law also includes a one-time 15.5% tax rate on the repatriation of foreign earnings. This money can then be used to boost capital spending or be returned to shareholders.

In short, despite these one-time paper losses, the new law should be another big bullish tailwind for banks.

Of course, banks aren't the only companies that stand to benefit from the new tax law...

Any firm with a big pile of overseas cash could be among the biggest winners, too. And at least one – iPhone maker Apple (AAPL) – is already taking advantage. As the Wall Street Journal recently reported...

Apple said it would pay a one-time tax of $38 billion on its overseas cash holdings and ramp up spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China...

Apple's $38 billion tax commitment is the largest such sum announced in response to the major overhaul of the U.S. tax code that President Donald Trump signed into law late last year. That law included an incentive for U.S. companies to bring home offshore holdings, with companies required to pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets...

U.S. companies have long pushed for such a change to enable them to repatriate overseas cash without what they considered an excessive tax hit. Apple on Wednesday cited the tax changes as the reason for its $38 billion payment. It didn't say how much of its $252.3 billion in overseas cash holdings it plans to bring home, though it will be the vast majority, Chief Executive Tim Cook told ABC News in an interview.

Our colleague Dr. David "Doc" Eifrig has been following this trend closely...

And he expects this "repatriation holiday" to drive a wave of cash back to U.S. investors. As he explained in a recent special report for his Retirement Millionaire subscribers...

Many firms pay out a portion of their earnings as a regular stream of dividends to shareholders. However, they can also authorize special, one-time dividends whenever they'd like.

When $2.6 trillion flows back to our shores, we expect the special dividends paid by companies to spike. Some will pay out millions to lucky shareholders.

You see, it's the duty of a company, its management, and board of directors to maximize the value of each dollar it holds for shareholders. If it can't find a good project to invest in, it often just sends investors a check.

This happened before. In 2004, the U.S. held a smaller repatriation holiday. Studies of the results show that 90% of the repatriated profits went to buyback, dividends, and executive compensation.

Doc singled out nine other companies besides Apple set to reward shareholders the most from this one-time event...

Of course, he and his team started by identifying those companies with the largest offshore cash piles. But that was just the beginning. More from the report...

Then, we compiled a library of research that determines what an extra dollar in cash is worth to a company. After all, some companies have plenty of cash on hand already, so adding $1 in cash only adds $1 in value. But a firm in need of cash means that an influx improves their prospects, so $1 could be worth $1.20 or even $1.50.

We found that cash levels and the amount of debt had big effects on just what a dollar was worth. We focused on companies that had the most to gain from getting an extra dollar from overseas.

Finally, we ran the companies through our own formulas that determine businesses with the highest-quality earnings, the best finances, and the best prices in the market today.

That left Doc and his team with a diverse group of stocks among technology, health care, and other sectors. These are mostly large, well-established companies – as well as a few smaller names – whose share prices could surge higher virtually overnight.

Learn more about this opportunity – and how to gain instant access to Doc's favorite repatriation opportunities – right here.

Regards,

Justin Brill

Editor's note: For the first time in more than a decade, a one-time cash event will put billions of dollars directly in the hands of ordinary Americans... virtually overnight. Doc recently released a video presentation to explain how to get your share of this money. Get all of the details here.

The Biggest Winners From Trump's New Tax Law

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