What do Schlumberger NV (NYSE:SLBC), Target Corp. (NYSE:TGTC), AT&T Inc. (NYSE:TC), Wells Fargo & Co. (NYSE:WFCD), The Hershey Co. (NYSE:HSYC), Hormel Foods Corp. (NYSE:HRLC) and Dr Pepper Snapple Group Inc. (NYSE:DPSC) have in common? According to CNBC, these stocks could be big winners once Republican-led tax reform becomes law.
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While reasons supporting the choices vary, a common denominator is the potential for lower corporate taxes following successful passing of tax reform. David Katz, president and chief investment officer of Matrix Investment Advisors Inc. sees Schlumberger, Target, AT&T and Wells Fargo and good value choices, even without tax reform. On the other hand, Katz says, all four corporations pay higher than average federal income taxes under current law and tax reform could boost their earnings by 5% to 10%.
Hershey, Hormel and Dr Pepper Snapple are at the top of Washington Crossing Advisors Chad Morganlander’s list because, as Morganlander says, all 3 companies are "growing, profitable and well-capitalized." Like others, however, they have high average tax rates, mostly because about 90% of revenues are generated domestically. This makes these 3 companies prime candidates for increased earnings under tax reform.
Behind The Reform
Driving the enthusiasm of both corporations and analysts for tax reform is a potential cut in the top federal corporate income tax from 35% to 20%. Another boost is a provision to allow businesses to deduct 100% of most capital expenditures in the year they are made, rather than over several years through depreciation. That provision, however, expires after 5 years.
There is a downside. Both the House and Senate bills limit the deductibility of interest by corporations, and eliminate several business credits and deductions. Repatriated cash from overseas would be subject to lower taxes, another plus for companies with substantial amounts of overseas cash and profits.
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Over the coming days and, perhaps, weeks the House and Senate will have to merge the two tax bills. Although many provisions are similar, some will require significant compromise. The “Obamacare” mandate, for example. The Senate version repeals the mandate, the House version does not. As for personal income tax rates, the House wants 4 brackets, capped at 39.6%. The Senate version has 7 brackets with a top rate of 38.5%.
Pass-through businesses would pay 25% on 30% of income and regular personal rates on the remaining 70% in the House version. The House also excluded taxpayers in professional services. The Senate leaves all pass-through income in the personal rates section but allows a 23% deduction on pass-through income. It also allows the deduction for professional services workers. These are only a few of the points that must be negotiated before a final bill is presented to President Trump for his signature.