There is a lot of noise out there about companies talking about impact of tax reform on their business. We spoke with several buy- and sell-side analysts to understand what they are expecting at this point, so soon following enactment of the legislation.
In a phrase, keep it simple. It’s clear most investors neither understand, nor care to understand, the details of the law itself. As one analyst admitted, “I haven’t learned the US tax code in 35 years, and I don’t plan to learn it now.” This desire for simplicity will help keep the tax discussion at a high level. It could, however, open the door for a significant amount of misunderstanding.
All analysts with whom we spoke pointed to three areas that are essential to cover the upcoming earnings release and discussions with investors.
- Provide the new tax rate going forward. If your fiscal year is different than a calendar year, provide guidance on the rate for both fiscal 2017 and fiscal 2018. Most analysts with whom we spoke are using 22 percent as a starting expected go-forward effective rate, down about 800 basis points from the average CFO’s expectation. Provide a narrow range of few percentage points for the new rate, if needed, and certainly err on the conservative higher side.
- Go-forward plan on repatriating cash. Investors want to know if and how the new tax environment will affect decisions on the cash you plan to repatriate. Apple, for example, recently said that it intends to repatriate some of its overseas cash pile. Investors immediately decided that all $252 billion would be brought back to enable the company to buy back one-third of its outstanding debt. This amount seems like a very big swing and offers a good example as to why you should provide clarity up front or a timeline when you will.
- Deploy the influx of cash or utilize enhanced cash flow. Most important, investors want to know how your company will be deploying the influx of cash from overseas and purported higher cash flow from a lower tax rate. There was a flurry of media activity in late December from many companies with strongly partisan Republican CEOs promising to use the savings to pay higher employee bonuses, enhance benefit programs, or even contribute to under-funded pension plans. We believe these media-friendly pronouncements probably won’t cut it with the Street, which will want management teams to focus on its priorities for investing in their businesses, M&A and returning cash to shareholders.
- If the answer truly is ‘investment in our people,’ take a hint from Darden’s CEO, Gene Lee, who talked about employees as one of their most competitive advantages and critical to the newly enhanced results-oriented culture they are trying to build.
- For those with large one-time benefits, expect questions related to upping share repurchases or cash dividends, or even paying a special dividend. For acquisitive companies, will the pace of M&A accelerate?
- Be ready with an answer if any of the benefits could likely be passed on to customers.
- Be clear if management is still evaluating uses for the cash, and provide a timeframe for when the topic will be discussed.
Best practice, all three topics should be addressed in your quarterly press release, the prepared remarks of your conference call, and any supporting slides. If large enough, a one-time benefit or cost should get front-cover real estate in one of the bulleted highlights, and the go-forward rate should be included in the CFO’s discussion. Include a pro forma calculation, as if the tax law was in place in the previous year.
“We are early in the stages of assessing the opportunities tax reform creates for us to invest in our customers and associates and to further strengthen our business, all of which should benefit our shareholders,” said Walmart’s CEO Doug McMillon. Back such an important statement with a robust discussion by the CFO to provide important insight to investors. This is our favorite so far.
“We anticipate that the tax reform could have a benefit of three-tenths to four-tenths of a percentage point in GDP, which then leads to obviously a tailwind for the overall industry.” said GM’s CFO Chuck Stevens.