News

How Companies Are Spending Their Tax Reform Windfall

On paper, US corporations are expected to take the billions in tax reform windfall profits and spend them on capex, R&D and higher wages. And based on their actions and announcements, some companies are doing just that, although “some” is the operative word. Because while the GOP tax overhaul has inspired what seems like a flurry of action from companies, with every day a new organization announcing one-time bonuses and minimum wage increases, others, however, are using their funds to lay off thousands of workers, usually at the same time as they hike wages (Wal-Mart being the most glaring example of this).

A closer look behind the headlines, however, reveals that most companies aren’t doing much at all with their tax savings, according to a new survey from Willis Towers Watson. As Bloomberg reports, the HR consulting firm asked 333 employers with at least 1,000 employees what they have done or plan to do as a result of the Tax Cuts and Jobs Act. Only 4 percent of companies said they had “increased wages for all employees”; an additional 3 percent said they planned to do so in the next year. While an further 13 percent said they’re “considering taking action this year or next,” a full 80 percent of companies aren’t considering giving raises at all.

“Companies are really spending time thinking about this,” said John Bremen, a managing director at Willis Towers Watson. “They’re trying to figure out what to do in terms of what’s going to be highest impact and greatest value.”

According to the HR consultancy, there are three general trends among employers.

  • One group is using the tax bill windfall to make previously planned investments, such as raising the minimum wage or increasing 401(k) contributions.
  • Another group is trying to modernize their workforce by hiring new kinds of workers.
  • The third group is attempting to keep up with the proverbial Joneses: As companies see their competitors offering headline grabbing bonuses, they feel compelled to do the same.

That said, it’s still too early to tell what the “trickle-down impact” of the bill will be, if any. Not surprisingly, the bonus and wage increases provided to employees have, so far, been a fraction of the savings companies are seeing from the tax bill. It will take years to determine the full impacts of the bill, economists say.

What about CapEx? In its latest weekly earnings tracker released this morning, BofA reports that even here trends appear to be easing. Whereas, the bank’s capex guidance ratio (instances of above- vs. below-consensus guidance on planned capex) was tracking above average for the majority of 2017, suggesting optimism by corporates on capex plans, it notes that “interestingly, in January to date (following the passage of tax reform in December), the one-month capex guidance ratio fell to its lowest levels since mid-2009, and the less-volatile three-month ratio fell below its long-term average to a 10-month low (Chart 7).”

If this is indicative of corporate intentions, the long-awaited capex boom will once again be indefinitely deferred. More from BofA on this troubling shift:

While some companies have been announcing incremental capex plans, others may have shifted some capex forward into 4Q, while others may be still be evaluating capital deployment plans for next year—capex guidance instances were more spare than usual for the month of January. A regression of our capex guidance ratio vs. actual US capex spending (where the former leads by two quarters) suggests that capex growth should stay healthy (6-7%) during 1H18 but could slow to 3% during 3Q (assuming the guidance ratio ends 1Q at today’s levels).

While the Great CapEx Revolution may be indefinitely postponed, there is a potential silver lining: roughly 20% of companies surveyed said they had already added Roth 401(k) retirement plans for employees, making it the most popular benefit change as a result of the tax bill. “Many employers are saying ‘Tax rates are lower, I’d rather pay taxes on the lower amount than pay gains in the future,’ because maybe they will go up in the future,’” Bremen said.

* * *

In any case, it is one thing to look at expectations and promises what companies may do, and something totally different to look at what they have already done.

Below, courtesy of BofA, we highlight major spending announcements by S&P 500 companies since tax reform was passed, including one-time bonuses, base wage increases, hiring plans, capex, charitable contributions and more.

Nearly half of the 40+ companies below have announced higher wages, and one-fourth have announced other compensation/retirement benefits. More than one-third plan charitable donations, and nearly 30% have announced increased capex. Several (including AAPL) also plan additional hiring. 25 companies have announced bonuses. We also include other spending color gleaned by our analysts from company earnings calls, etc.

 

Separately, as we first showed two weeks ago, corporate profit estimates continue to soar thanks to tax reform, as analysts increasingly incorporate tax savings into forecasts. As a result, bottom-up 2018 EPS has surged by nearly $8 since mid-Dec. to $152.

Source: zerohedge.com