One drama ends and another begins. Now that companies have all that money coming from Donald Trump’s tax overhaul, what are they going to do with it?
It’s potentially a divisive issue. With corporate rates falling to 21 percent from 35 percent, opponents predict executives will use the windfall to shower money on shareholders through buybacks. Trump’s vision of freed up cash coursing through the economy as new investment will prove a costly delusion, they say.
One constituency that doesn’t subscribe to this view is equity analysts, at least according to their work on individual companies. A top-down analysis of thousands of companies shows that Wall Street firms expect managers will use the money to show plants and equipment some love as capital investment.
Monthly capex layouts for S&P 500 firms will reach to a two-year high of $78 billion in 2018, the estimates show. Companies now spend about $71 billion a month, a level virtually unchanged since late last year. Passage of the tax cuts seems to have pushed Wall Street to boost its forecasts faster than corporates increase their actual spending. The gap between the projections and actual outlays is now the widest since August.
Sure, analysts could be wrong. They’ve been boosting their capex forecasts since mid-2016, only to see corporate executives trim it over that stretch.
That was before approval of the bill, though, which along with a cut in the corporate rate tweaks the tax code in ways that may be favorable for investment. Before the tax reform, companies that spent, say, $100 on a new printer, had to deduct the expense over its useful life of about five years. The new legislation will let them expense the entire sum at once.
That could mean additional millions in free cash flows for companies that are already benefiting from the 40 percent reduction in the corporate levy. About 36 percent of corporate executives plan to increase capital investment in 2018, according to a survey compiled by Evercore ISI, four times more than in 2016.
“After a more or less anemic growth in capital spending, 2018 can be the year that makes a difference,” said Walter Todd, Greenwood Capital chief investment officer. “The tax reform gives a strong incentive for companies to invest more in growth.”
Companies from AT&T Inc. to Comcast Corp. have outlined increased spending on U.S. infrastructure. But by and large it’s too early to know for sure how the tax overhaul will play out.
A pick-up in corporate spending doesn’t mean corporate buybacks are going away. Far from it. In one of the more extreme estimates, the overhaul could trigger a 70 percent increase in buybacks to around $875 billion for S&P 500 companies, according to Bloomberg Intelligence show.