On December 22, 2017, Donald Trump signed into law the Tax Cuts and Jobs Act. The major beneficiary was large corporations that saw the corporate tax rate fall from 35% to 21%. The cuts were intended to provide American corporations with additional cash to reinvest in the economy.
Two years on, we know big corporations made out like bandits, while the American taxpayer essentially got screwed. Since Trump has taken office, the U.S. budget deficit has grown by 50%, a direct result of U.S. corporations paying $135 billion less in corporate taxes in 2018 than they did in 2017.
Interestingly, according to the Center for Public Integrity, the number of companies that paid no taxes in 2018 doubled from a year earlier. Again, a direct result of the Trump tax cut.
Who benefited most? Banks, Big Pharma and tech companies had a field day.
Another big beneficiary of the Tax Cuts and Jobs Act: the companies who bought back their shares. That money was supposed to go to American innovation; instead, it went to the 1%.
For the realists out there, since the tax cut is water under the bridge, you might want to consider these seven stocks to buy. All of them did well as a result of President Trump.
Stocks to Buy: Amazon (AMZN)
In 2018, according to the Institute on Taxation and Economic Policy, Amazon (NASDAQ:AMZN) had a tax benefit of $129 million on U.S. income of $10.8 billion.
Overall, between current and deferred taxes, Amazon’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $1.2 billion on $11.3 billion in income before taxes, an estimated tax rate of just 10.6%.
However, unlike many of its wealthy Fortune 500 peers, Amazon didn’t use the savings to buyback its own shares. In fact, Amazon hasn’t repurchased any of its shares since Q1 2012, a lengthy streak of 30 quarters without a buyback.
While I have mixed feelings about the e-commerce giant — it’s a great stock to own but it mistreats a large segment of its workforce — it’s good to see that the taxes it didn’t pay in 2018 were reinvested in growing the company and not reducing the number of shares outstanding.
From that perspective, taxpayers can be thankful.
Deere & Company (DE)
In 2018, according to the Institute on Taxation and Economic Policy, Deere & Company (NYSE:DE) had a tax benefit of $268 million on U.S. income of $2.2 billion.
Overall, between current and deferred taxes, Deere’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $1.7 billion on $4.1 billion in income before taxes, an estimated tax rate of 41.5%.
While it’s true that Deere’s pre-tax tax rate was much higher than Amazon’s in 2018, that’s because the company paid more than $700 million to account for the repatriation of foreign-held cash and the net deferred tax asset remeasurement.
In fiscal 2018, Deere repurchased $958 million of its stock, more than four times the amount it bought back in 2016 and 2017 combined.
I wonder if the tax cut had anything to do with the acceleration of share repurchases? In a big way.
Delta Airlines (DAL)
In 2018, according to the Institute on Taxation and Economic Policy, Delta Airlines (NYSE:DAL) had a tax benefit of $187 million on U.S. income of $5.1 billion.
Overall, between current and deferred taxes, Delta’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $1.2 billion on $5.2 billion in income before taxes, an estimated tax rate of 23.1%.
However, the overall income taxes it paid in 2018 were 47% less than in 2017. The company used those savings to buy back $1.6 billion of its stock at an average cost of $55.17. Since 2013, Delta’s repurchased $12.3 billion of its stock, reducing its share count by 21%.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Delta’s largest shareholder holding 10.8% of its stock, ought to be very happy about the Trump tax cut.
General Motors (GM)
In 2018, according to the Institute on Taxation and Economic Policy, General Motors (NYSE:GM) had a tax benefit of $104 million on U.S. income of $4.3 billion.
Overall, between current and deferred taxes, GM’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $474.0 million on $6.4 billion in income before taxes, an estimated tax rate of 7.4%.
So, how much stock did GM buyback in 2018?
Just $190 million, down significantly from $4.5 billion in 2017 and $2.5 billion in 2016. Perhaps that’s a good thing that GM has scaled back its share repurchases. It bought back a lot of stock prior to the 2008 recession and then it had to be bailed out by the federal government.
GM finished 2018 with cash, cash equivalents, and marketable securities of $26.8 billion, 13% higher than a year earlier.
Thank you, President Trump.
Netflix (NFLX)
In 2018, according to the Institute on Taxation and Economic Policy, Netflix (NASDAQ:NFLX) had a tax benefit of $22 million on U.S. income of $856 million.
Overall, between current and deferred taxes, Netflix’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $15.2 million on $1.2 billion in income before taxes, an estimated tax rate of 1.2%.
It’s important to note that any savings the company experienced from the tax cuts weren’t put toward share repurchases. That’s because it repurchased more than $1 billion of its stock between 2007 and 2011, leaving it with too little cash to pay for content-purchase commitments. As a result, it had to do a secondary offering of its stock at $70 a share, to make up the difference.
At the end of 2018, it had more than $3.8 billion in cash and cash equivalents, 34% higher than a year earlier.
Investors who bought shares in the secondary offering and still hold them are up 371% in the eight years since.
Principal Financial (PFG)
In 2018, according to the Institute on Taxation and Economic Policy, Principal Financial (NASDAQ:PFG) had a tax benefit of $49 million on U.S. income of $1.6 billion.
Overall, between current and deferred taxes, Principal’s provision for income taxes (both federal and state, along with international taxes) in 2018 was $230.7 million on $1.8 billion in income before taxes, an estimated tax rate of 12.8%.
In the three years between 2016 and 2018, Principal repurchased $1.2 billion of its stock, $672 million of which it bought back in 2018 at an average price of $55.50. Interestingly, despite buying back three times as much stock in 2018 as it did in 2017, it did nothing for the stock, which is trading around $55.
Perhaps Principal learned a lesson buying back its stock at prices in 2018 that were higher than it had seen since 2007. Through the first nine months of 2019, it’s repurchased $198 million worth of PFG stock, less than half the $462 million it bought back in the same period a year earlier.
Salesforce (CRM)
In 2018, according to the Institute on Taxation and Economic Policy, Salesforce (NYSE:CRM) had a tax benefit of $0 on U.S. income of $800 million.
Overall, between current and deferred taxes, Salesforce’s provision for income taxes (both federal and state, along with international taxes) in 2018 was -$127.0 million on $983 million in income before taxes, an estimated tax rate of -12.9%.
Now, it’s important to note that a company’s provision for income taxes, is an estimate of how much tax it expects to pay in a given year. The amount of taxes actually paid in a given year often differs, sometimes by a lot.
In Salesforce’s case, it paid out $83 million cash, net of refunds, in 2018, which still isn’t a lot for a company that generated annual sales of $13.3 billion.
I guess Marc Benioff, Salesforce’s CEO and founder, didn’t get to be worth $7.4 billion by not taking advantage of strong tax management.
Rather than use the extra cash from the Trump tax cut for buybacks, Salesforce used most of its $2.8 billion in free cash flow in fiscal 2018 to repay debt or make acquisitions, a much wiser use of its capital.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.