MorningWord 8/1/13: Earlier this week President Obama gave a speech at an AMZN fulfillment center in Tennessee where he proposed what some are calling a “Grand Bargain” with Congress where in return for greater spending on education and job initiatives, he would not oppose lowering corporate taxes from the mid 30% range to the high to mid 20s. Debating the merits of such a proposal is not interesting to me, and don’t worry it won’t be done here in this space. But one potential addition to such a wide ranging proposal would possibly be a sort of “tax holiday” for U.S. multinationals to repatriate their overseas cash without having to to pay Uncle Sam a third on the way in the door. Again, I am not going to debate the politics or longer term effects of a onetime kiss to U.S, corporate coffers, for the most part this would be a fairly shareholder friendly act resulting in larger share buybacks, paying down debt, paying dividends and hopefully re-investing in the business with cap-ex and r&d that would create jobs here in America.
There has been much debate as to whether the 2004 tax repatriation holiday did in fact result in any increase in the above desired results, but my sense would be that given the recent trend of rising labor costs in emerging markets, U.S. multinationals could be in a fairly unique position to use overseas profits that come at low tax rates to create competitive manufacturing facilities in the U.S. Apple CEO Tim Cook is on board, as the company recently announced a $100 million initiative to “produce” Macs in the U.S. (here).
As the WSJ noted in May, citing analysis from JP Morgan (here). “out of the $974 billion in cash on the balance sheets of 602 U.S. multinationals, at least $588 billion, or 60%, is sitting in foreign accounts”. So what would it mean for the stocks of hundreds of the largest American companies if they had the opportunity to bring back hundreds of millions of dollars on shore, tax free? It would likely result in a huge sentiment boost and possibly offset some of the caution that C-level executives are feeling about spending their way out of a slow growth environment, but there could also be some unintended results.
On Tuesday, in anticipation of Obama’s speech, it appeared that some large cap tech and pharma stocks caught a bid (here: AAPL, CSCO, ORCL, MSFT, AMGN, JNJ & PFE) on what was otherwise a down day in the SPX. While I don’t think this is a sound investment theme and clearly not a reason to go out and buy any of these stocks with large overseas cash balances, but it could possibly be a reason to take a look at some smaller cap names that have perennially been on take-over candidate lists, as the new found un-taxed cash could cause a rash of M&A, think AMD, NTAP, JNPR.RHT, DDD, GRMN, AKAM, YELP & ZNGA to name a few.