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Tax Repatriation: Help for Investors, Not For Job-Seekers

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Allowing US companies to bring back overseas profits without taking a big tax hit would benefit shareholders but might not do much for the economy or jobs.

The debate over tax repatriation has focused thus far on the hoped-for economic benefits.

But according to one analysis, the impact actually could be greater on the stock market and result in a huge boost to the Standard & Poor’s 500 dividend.

The Senate has just begun considering the Foreign Earnings Reinvestment Act, a measure that essentially would repeat a move in 2004 to bring back U.S. company profits earned overseas—often referred to as repatriation.

Savita Subramanian, quantitative strategist at Bank of America Merrill Lynch, said the result in 2004 was not capital expenditures and hiring but rather share buybacks and dividend payments.

Critics of the Senate measure contend the same thing could happen again this time around.

However, Subramanian said the effects could be substantial, at least from a market perspective.

“If share prices remain depressed and interest rates remain low, new buybacks and dividends could have a bigger positive impact on stock prices than in 2004-05, in our opinion,” Subramanian said in a note to clients. “If even a quarter of the estimated capital were used for dividends, the yield of the S&P 500 could triple.”

Of course, that’s all well and good for investors, but it’s not really how repatriation is supposed to work.

The idea is that if companies can bring back their profits earned overseas to the mainland without taking a hit from the onerous U.S. corporate tax rate—second in the world only to Japan—then that will boost hiring and spur economic growth.

But that’s unlikely, according to the BofAML analysis.

At stake is the return of $1.5 trillion in earnings—or 14 percent of the total S&P 500 market capitalization. If even 25 percent was returned, it would benefit holders of tech stocks in particular “given its high foreign exposure and high net cash position,” Subramanian wrote.

The benefits would be widespread, with materials, energy, health care and consumer staples also poised to surge. Utilities, telecom and financials “given their low levels of overseas cash,” would see “little effect” from repatriation, the note said.

Overall, the move could take the S&P 500’s current yield from 2.2 percent to 6 percent, a figure based on the notion that $400 billion would be deployed to dividends.

Should that happen, it at least would get more money circulating, though real economic conditions such as employment and housing may not improve much.

“A boost to stock prices from simply returning cash could translate to greater equity market returns (both capital appreciation and total return) as well as even a muted wealth effect,” Subramanian wrote.

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