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The Winners and Losers of Trump’s Tax Plan

The Winners and Losers of Trump’s Tax Plan
March 07
12:44 2017

(InvestorsAlley) – While President Trump has proposed a significant decrease in the corporate tax rate, that doesn’t mean it will affect all companies equally. There will be winners and losers, most notably companies that import versus export in America, so ditch these six losers and replace them with the seven stocks shared today.

Last week saw Treasury Secretary Steven Munchin finally lifting the lid just a bit on the Trump Administration’s plan for an overhaul of the U.S. tax system.

Munchin told the Wall Street Journal he would like to see the passage of major tax legislation before Congress leaves for its August recess.

With few concrete details still available on the Trump tax plan, Wall Street has nevertheless built up major expectations on how the new tax regime will give a major boost to U.S. companies’ bottom line.

The Easy Part

Part of the likely Trump plan is rather straightforward.

First, there will be a cut in the current corporate tax rate of 35% down to 15% or 20%.

Second is a historic tax break. Companies will be allowed to write off 100% of capital investments in the very first year. Presently, firms gradually expense their capital investments over a period of three years up to 20 years or more.

This substantially raises the future returns for corporations on new plants and equipment, which raises the likelihood of more capital investment here in the United States.

However, it is likely that President Trump will use any tax revamp to change corporate behavior. That is, to make more goods here in the U.S. and fulfilling his campaign promise of putting ‘America First’.

The Tough Part

One possible provision is to eliminate the deductibility of interest expenses from corporate profits. A provision that has been in the tax code since 1918 by the way.

That will hurt firms with lots of debt on their books and companies that use debt a lot, such as private equity firms.

That should curtail the issuance of bonds by corporations, possibly driving up the value of corporate bonds currently in existence.

But it may also curtail stock buybacks. That’s because many companies use funds generated from debt sales to buy back their stock.

But now we come to the possible measure that is definitely “bigly”.

If Trump goes along with provisions of the tax plan in the House of Representatives, we would likely see what is called a border adjustment tax or BAT.

It would both raise and lower corporate income taxes. A BAT would raise taxes on import goods into the U.S. a lot, while providing big tax credits to firms that export goods.

A potential BAT has unleashed a civil war among corporate lobbyists for the likely winners (exporters) and likely losers (importers).

SEE ALSO: The Future of Dividend Investing Under President Trump

The House bill also pairs the BAT with the concept of a “territorial” tax regime. Right now, companies have a 35% tax rate on income, no matter where in the world it is earned. The House proposes the U.S. adopts the global standard of taxing only the income earned at home. That is, firms will be only taxed on what is sold here in the United States.

Some of the goals of these measures is to both end the need for headquarter switching to low-tax nations (inversions) and the parking of an estimated $2.5 trillion in foreign subsidiaries.

The BAT is also expected to generate lots of revenue for the government, paying for a large part of the cut in corporate tax rates.

One other point. Lawyers are already working on challenging the BAT before the World Trade Organization (WTO). That may lead Trump to dump being in the WTO, which would cause market turmoil for sure.

After all, the WTO – established in 1995 – is part of the global trading system set up largely by the United States. But we’ll have to see what happens on that front.

Winning and Losing Sectors from a BAT

Goldman Sachs gives us some insight into what sectors will be the losers from a BAT.

It named the apparel (and retail) sector as number one on the list having the highest net imports. Companies sure to be hurt include the likes of Walmart (NYSE: WMT), Target (NYSE: TGT), Home Depot (NYSE: HD), Gap (NYSE: GPS), Best Buy (NYSE: BBY) and Nike (NYSE: NKE).

That is followed on Goldman’s list by: computers, autos, electrical equipment and primary metals.

Goldman says relative beneficiaries include: transportation groups (aircraft, airlines, railroads), media and publishers, and agriculture. Agricultural exports may be hurt though if countries ban U.S. products in retaliation for tariffs or other trade sanctions

Companies favoring the BAT include: General Electric (NYSE: GE), Boeing (NYSE: BA), Caterpillar (NYSE: CAT), Dow Chemical (NYSE: DOW), Merck (NYSE: MRK) and Pfizer (NYSE: PFE).

How to Invest Under a Trump Tax Plan

When it comes to investing in a Trump tax plan environment, it gets tricky.

For example, here is a fact of which most investors are unaware. In a study released in 2016, the Government Accounting Office (GAO) reported that large profitable U.S. corporations – in the period from 2008 to 2012 – only paid an effective federal tax rate of 14%!

So, for some large companies, a tax cut may be a non-event.

But of course, there are a number of exceptions. Companies such as Deere (NYSE: DE) and Harley-Davidson (NYSE: HOG) are paying a high tax rate.

The companies most likely to pay the highest tax rates are smaller U.S. companies. Analyst estimates from Morgan Stanley and others suggest the cut in corporate tax could add 30% to the profits of many smaller firms.

So now one can see the logic of the massive rally in small capitalization stocks since Trump’s election.

Again, investors need to do their legwork on each individual company.

For example, one of my favorite small cap companies is Argan (NYSE: AGX), which is heavily involved in the building, operating and maintaining of gas-fired power plants. Its effective tax rate in the four quarters of 2016 were: 37.33%, 33.68%, 33.54% and 29.88%.

A steep cut in the corporate tax rate will give it a real boost.

But of course, we will all have to wait and see what the final tax reform bill will look like, hopefully this year.

Some of the other main benefactors of lower taxes will be high-yield dividend stocks. These are the stocks with a high potential for increased dividend growth and a huge margin of safety. They also make up the majority of my investments. Finding high-yield stocks with growing dividends and safe payments is always one of the features I look for and recommend in my high-yield income newsletter, The Dividend Hunter.

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7 Winners and 6 Losers of Trump’s Proposed Tax Plan

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