Explainer: Investors to scour outlooks for U.S. companies’ tax cut plans

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The trading floor is seen on the final day of trading for the year at the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., December 29, 2017. REUTERS/Andrew Kelly
The
trading floor is seen on the final day of trading for the year at
the New York Stock Exchange (NYSE) in Manhattan, New
York

Thomson
Reuters


By Caroline Valetkevitch

NEW YORK (Reuters) – Corporate results for 2017’s final quarter
will start pouring in next week and are expected to be laden with
one-time charges as U.S. companies begin to cope with tax code
changes, including a one-time tax on trillions of dollars in
profits held overseas.

Wall Street investors will be tuned in to chief executives’
statements about plans for 2018 and beyond for savings that will
result from a deep cut in corporate income taxes enacted last
month by the U.S. Congress and President Donald Trump.

Some investors expect many companies will use their tax savings
to buy back shares and increase dividends, while others will look
for increased capital spending or wage increases.

Walmart announced on Thursday that it will raise entry-level
wages for hourly employees, partly because of tax cuts. It also
said it would lay off thousands of workers and close dozens of
Sam’s Club stores.

The tax law was Trump’s first major legislative achievement since
he took office in January last year, and it slashes the corporate
income tax rate to 21 percent from 35 percent.

The tax package, approved despite the unanimous opposition of
Democrats, helped drive stock market gains in the last months of
2017. The momentum has continued in 2018, and there are
widespread expectations that investors will overlook
fourth-quarter charges and focus on upbeat corporate outlooks.

“What you’ll see is companies will take a one-time hit, but it’s
not going to have a bearing on stock price movements,” said David
Katz, chief investment officer at Matrix Asset Advisors in New
York. “They will talk about 2018, and we feel pretty confident it
will be a win to a big win for U.S. companies.”

Estimates for 2018 S&P 500 earnings have risen more than 2
percentage points since the beginning of the year, partly due to
analysts factoring in the impact of the tax code changes.

Profit growth for the year is forecast at 14.2 percent, according
to Thomson Reuters data, while analysts expect fourth-quarter
earnings to have risen 11.8 percent from a year ago.

WINNERS IN ENERGY

The energy sector is expected to post the biggest year-over-year
gain in earnings. Estimates have risen in recent weeks following
a surge in oil prices, which this week climbed to their highest
level in three years.

In the short term, many companies are expected to take one-time
charges against earnings because of the tax bill, which includes
a one-time tax on an estimated $2.6 trillion in profits held
offshore by multinationals.

Among early reporters, Delta Air Lines said on Thursday that it
was taking a one-time charge of $150 million on tax code changes.
It said the new tax law would lower its tax rate to between 22
percent and 24 percent in 2018, and that it expects the tax cuts
to help drive business demand. Delta’s stock rose on Thursday, as
did other airlines’ shares.

Under the new law, companies with earnings parked offshore will
face a one-time tax of 15.5 percent on cash and equivalents and 8
percent on illiquid assets, payable over eight years.

In the future, domestic corporate profits will be taxed at 21
percent, while most foreign profits will no longer be taxed,
within some limits. The new law also allows companies to write
off immediately the full value of new capital investments.

BANKS TO ADJUST

Banks and other companies will need to remeasure the value of
their deferred tax assets and liabilities at the new tax rate, a
note from strategists at Goldman Sachs said.

For instance, JPMorgan Chase & Co,, which will be the first
big bank to give results when it reports on Friday, could show a
35 percent plunge in net income from a year earlier, based on
analysts’ estimates.

Technology and healthcare companies are sitting on the largest
stash of overseas cash and are expected to post the biggest
charges related to the one-time repatriation tax, Goldman
strategists wrote.

Apple “will incur the largest tax bill of any company under the
provision, owing $33 billion on its $216 billion of overseas
cash,” they wrote.

As a group, the technology sector, which led the market’s rally
in 2017, is expected to benefit less from the tax rate cut than
most other sectors, analysts said.

(Reporting by Caroline Valetkevitch; Editing by Kevin Drawbaugh
and Daniel Wallis)

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