President-Elect Trump has called for a reduction in the 35% U.S. corporate tax rate to 15%. With Republicans in control of the Senate and House, it is probable there will be a large corporate tax cut.
Who are likely to be the major winners?
No tax break affects companies equally. Although lowering corporate taxes across the board, Trump’s plan would create lopsided winners. Lightly taxed corporations would probably see only modest benefits while companies paying the full 35% freight should get the most relief. Because of R&D tax credits, technology companies like Qualcom (NASDAQ:QCOM) and Skyworks Solutions (NASDAQ:SWKS) already pay low taxes (both 17%) – well-below Trumps’s proposal; they have the least to gain. Most multinationals keep their overseas earnings offshore, well out of reach of the tax man. While these multinationals benefit from the proposed 10% repatriation tax, it is unlikely their bottom lines will get much plumper under the Trump plan. Although the multinationals gain access to their foreign capital, the reshoring of foreign profits is a one-time event. Like the 2004 Repatriation Act, it is helpful but temporary.
The big beneficiaries of the Trump Tax Cut are domestic corporations bearing the full 35% tax rate. Confined to the 50 states, domestics have not had the luxury of a “Double Irish With A Dutch Sandwich” tax strategy. Unlike multinationals, they have had no place to hide.
Perhaps, the hardest hit companies have been the regional banks – and they would be the most helped by the Trump tax rate cut. Banks like Bank of the Ozarks (NASDAQ:OZRK), Home Bancshares (NASDAQ:HOMB), Pacific Continental Corporation (NASDAQ:PCBK), and Signature Bank (NASDAQ:SBNY) all pay at least 36% U.S. and state income tax.
(Sourced from Morningstar.com)
Consider my favorite regional bank: Bank of the Ozarks. Ozarks currently pays a 36% tax rate. If Congress reduced the tax rate from 35% to 20%, Ozarks would likely pay a 23% tax rate (blended from state and U.S. corporate tax). Consensus expects $2.98 in 2017. With the tax rate reduction, Ozarks brings in $3.59. If the stock traded at its current 17 fPE, Ozarks would rise to $61, a 20% price increase. Likewise, Home Bancshares would be worth 20% more. Additionally, almost all regionals would see their ROA lift (Under the assumed 35% to 20% scenario, ROAs rise 20%.)
Here’s a list of the likely share increases, solely on a 35% to 20% tax cut:
(Projected prices affected by a U.S. tax cut 35% to 20% assuming current PE ratios.)
Bottom Line
Regional banks have long suffered under a hefty 35% U.S. corporate tax rate. In the stock universe, these financials have the most to gain from a tax cut – another reason to rerate the regional banks.
Disclosure:I am/we are long OZRK, HOME, PCBK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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