Goldman: Trump's 15% corporate tax rate would help these stocks the most

Published Fri, Nov 11 201611:57 AM EST

Goldman Sachs said changes in corporate tax law proposed by President-elect Donald Trump , who has called for lowering the federal rate to 15 percent from 35 percent, will create an investment opportunity around those companies currently paying the highest effective rates. "Amid discussions on subjects including inflation, infrastructure and regulation, no potential consequence of the Trump victory has generated more client questions," wrote Goldman equity strategist Ben Snider in reference to the possible impact of lower taxes on U.S. corporations. "Among major developed nations, the current U.S. statutory rate of 35 percent ranks highest. The Trump rate of 15 percent, adjusted slightly higher to include state and local taxes, would rank among the lowest in the world." The U.S. currently has the highest corporate tax rates in the world when accounting for the combined federal and state/local rates, according to Goldman. But S & P 500 companies typically pay much less than that on average because of various tax breaks and accounting maneuvers. Source: Goldman Sachs "The median S & P 500 company pays an effective tax rate of 28 percent, more than 10 percentage points below the combined federal and state/local statutory corporate tax rate of 39 percent. The index in aggregate pays a 26 percent effective rate. The gap between statutory and effective rates has been growing for 25 years since the Reagan tax cuts of the 1980s," Snider wrote. Analysis by the investment bank suggests that should federal tax law be modified, corporations might be able reduce their effective tax rate by 10 to 20 percentage points, a huge boost to their bottom lines. Snider explains, "Each percentage point change in the effective U.S. corporate tax rate is worth about $1.50 of 2017 S & P 500 EPS. Using our baseline forecast for $116 of S & P 500 operating EPS in 2017, a change in the effective tax rate to 20 percent from the current 26 percent would boost our EPS forecast by 8 percent to $125. This would represent nearly 20 percent growth vs. 2016 compared with our current forecast of 10 percent." As a result, the strategist believes those companies with the highest effective tax rates stand to benefit the most from corporate tax reform, particularly energy names which have paid the highest effective tax rate in the past decade. On the contrary, the sectors with the lowest tax rates, health care and tech, could underperform. As proof of this trend, Goldman notes that since Election Day, its basket of companies with the highest 10-year median tax rates has outperformed a basket of low-tax stocks by nearly 2 percent. Some of the companies in Goldman's highest-tax-paying basket include Marathon Oil , Cardinal Health and CME Group , which each paid a median tax rate of at least 37 percent in the past decade. Apart from lower taxes, multinational companies could also receive special treatment on foreign income, according to Goldman's analysis. "U.S. corporates currently pay no U.S. tax on profits earned and 'permanently-reinvested' overseas. S & P 500 companies have $2.4 trillion of overseas profits, of which cash likely accounts for roughly $1 trillion. President-elect Trump has suggested a repatriation tax holiday during which a 10 percent one-time tax would be levied on cash brought back to the U.S.," Snider wrote. Based on historical data, Goldman predicts repatriated cash is most likely to be used by corporations to buy back their own shares, in turn boosting stock performance. "Following the passage of a similar tax holiday in 2004, U.S. companies repatriated $300 billion in cash. S & P 500 buybacks rose by 84 percent in 2004 and 58 percent in 2005," Snider said.

Office buildings in New York

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"Amid discussions on subjects including inflation, infrastructure and regulation, no potential consequence of the Trump victory has generated more client questions," wrote Goldman equity strategist Ben Snider in reference to the possible impact of lower taxes on U.S. corporations.

"Among major developed nations, the current U.S. statutory rate of 35 percent ranks highest. The Trump rate of 15 percent, adjusted slightly higher to include state and local taxes, would rank among the lowest in the world."

The U.S. currently has the highest corporate tax rates in the world when accounting for the combined federal and state/local rates, according to Goldman. But S&P 500 companies typically pay much less than that on average because of various tax breaks and accounting maneuvers.