9 big taxpayers could get Trump relief
Investors go to great lengths to cut their tax bills. But now, they're actually looking for companies with the highest tax rates.
Companies with high tax rates are turning into a hidden asset on Wall Street as President-elect Donald Trump vows to cut corporate tax rates. These companies and others like them could find lower taxes, if approved, boost profits practically overnight.
There are nine companies in the Standard & Poor's 500, including healthcare firm Centene (CNC), gadget seller Best Buy (BBY) and utility AES (AES) that have paid effective tax rates of 40% or higher on average the past five years as well as an above average tax rate the past 12 months.
Finding companies with high tax rates on the idea they can benefit next year was a recurring theme at the 21st annual Paste BN Investment Roundtable held in December. Companies that aren't paying so much in taxes can do things with their money that benefits investors.
"The potential energy is the idea that the current tax rates are high, and they're going to go to a lower tax rate, which means that will free up a lot of cash flow that can be used for a different purpose," says David Kostin, chief U.S. equity strategist at Goldman Sachs.
Centene, a healthcare insurer, shows how some companies actually do pay just about the full statutory rate. The company has paid an effective tax rate of 38% or higher each of the past five years. That's just about the biggest tax load a U.S. company can pay, Kostin says. The statutory tax rate in the U.S. is 35% and then the state rate of 4% takes the total rate up to 39%, he says.
Many companies that do most of their business in the U.S. stand to get a break if Trump cuts taxes, says Michael Pachter, managing director of equity research at Wedbush Morgan. Best Buy, an operator of more than 1,500 consumer electronics retail stores largely in the U.S., paid an effective tax rate the past five years that has been consistently high and hit roughly 37% over the past 12 months. Since Best Buy is primarily U.S-based, it can't take advantage of foreign tax credits and by "keeping money parked overseas" like Apple (AAPL) and Amazon (AMZN), he says.
But now, Best Buy could wind up being a big winner from any lowered taxes in the U.S. "When tax rates are cut, the companies with global operations see only a modest benefit because their effective tax rates are already low," he says. Investors are already pricing in the tax boon Best Buy might achieve. Shares of Best Buy have already run up 19% since the election, largely on anticipation of lower taxes. If corporate taxes fall by 10%, "Best Buy's net income goes up by the full amount of the tax cut," Pachter says.
It's important to know tax rates can be volatile. The tax rate at Centene spiked last year due to a change related to the Affordable Healthcare Act fee was not tax deductible this year, says Thomas Carroll, analyst at Stifel. Centene's tax rate is due to fall in 2017, but it could still benefit depending on what happens to the ACA and tax rates.
That's the one sticking point: It's unclear what tax rates will be next year. More will be clear in March when Congress narrows down what tax rates will be, Kostin says. "That's when you'll get a sense of the budget deficit that Congress is going to live with," he says.
BIG TAX SPENDERS
Standard & Poor's 500 companies that paid the highest average effective tax rates on average the past five years and above average tax rates this year so far
Company, 5-year average tax rate, 5-year median tax rate, tax rate LTM*
Best Buy, BBY, 1338.6**, 35.8, 36.4
S&P Global, SPGI, 117.9, 35.6, 30.2
AES, AES, 76.7, 32.0, 51.6
CenturyLink, CTL, 69.6, 37.8, 33.0
Cardinal Health, CAH, 41.7, 36.9, 38.4
Alexion Pharmaceuticals, ALXN, 41.4, 35.9, 31.7
Centene, CNC, 41.4, 39.8, 53.8
Humana, HUM, 40.6, 36.5, 51.1
Leucadia National, LUK, 40.5, 37.4, 47.7
* Last 12 months
** Company's average tax rate was inflated by an unusually high effective tax rate in 2012
Source: S&P Global Market Intelligence, Paste BN