Goldman says buy shares of companies paying the most in taxes for a Trump tax break boost

Published Mon, Dec 12 20161:16 PM EST

Lower corporate taxes under President-elect Donald Trump are likely to boost profits significantly for S & P 500 companies, according to Goldman Sachs, which advised clients to buy certain stocks poised to benefit the most from this trend. The firm cited data showing a rise in earnings after companies lower their effective tax rates through legal means. "Falling effective tax rates have been the greatest contributor to rising S & P 500 ROE [return on equity] during the last 40 years and potential tax cuts would likely boost profitability even more," Goldman's chief U.S. equity strategist David Kostin wrote in a note to clients. Return on equity for S & P companies rose by 21 basis points to 14.3 percent last quarter, halting eight quarters of consecutive declines and marking a potential turning point in profitability, Kostin said. The strategist explains that if effective tax rates were to fall to 20 percent from 26 percent, as proposed by House Republicans, return on equity for the S & P 500 index could rise to 15 percent, about a full percentage point increase from the current levels. Among specific sectors, Goldman believes consumer stocks could benefit the most from lower taxes. "If effective tax rates had been 20%, 3Q 2016 ROE [third-quarter return on equity] would be more than 200 bp higher in both Consumer Discretionary and Consumer Staples, which rank among the sectors with the highest effective tax rates," the strategist said. Goldman also notes that increases in borrowing costs as a result of higher interest rates won't be enough to offset the overall benefit from lower taxes. However, some sectors could be at risk. "Aside from Financials, Industrials and Telecom Services have the highest leverage and therefore are most at risk from rising borrow costs," Kostin wrote. As a result of lower taxes, the strategist believes those consumer companies with the highest effective tax rates stand to benefit the most from corporate tax reform. Goldman notes that since Election Day, its basket of companies with the highest 10-year median tax rates, which includes firms across multiple sectors, has outperformed a basket of low-tax-rate stocks by more than 5 percent. Below we highlight the consumer companies in Goldman's highest-tax-paying basket. Gap , Under Armour and Whole Foods Market are some of the names on the list. These three companies paid a median tax rate of 39 percent over the past decade.

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The firm cited data showing a rise in earnings after companies lower their effective tax rates through legal means.

"Falling effective tax rates have been the greatest contributor to rising S&P 500 ROE [return on equity] during the last 40 years and potential tax cuts would likely boost profitability even more," Goldman's chief U.S. equity strategist David Kostin wrote in a note to clients.

Return on equity for S&P companies rose by 21 basis points to 14.3 percent last quarter, halting eight quarters of consecutive declines and marking a potential turning point in profitability, Kostin said.