Sweeping U.S. tax legislation appears to be on the verge of approval, lifting the prospects in particular for banks, telecoms, transports and other industries that stand to gain the most from lower corporate tax rates.
Continue Reading Below
The Republican-led U.S. House of Representatives approved the legislation favored by President Donald Trump on Tuesday, sending the bill to the Senate, where lawmakers were due to take up the package later in the evening.
The bill slashes the corporate income tax rate to 21 percent from 35 percent. That would boost overall earnings for S&P 500 companies by 9.1 percent, according to UBS equity strategists.
Momentum behind the tax bill over the past month has helped propel the stock market, which had already rallied sharply this year, to fresh record highs.
The S&P 500 has climbed about 5 percent since mid-November when the House of Representatives passed its tax overhaul bill.
But the bill, which also includes a one-time tax on profits held overseas and industry-specific measures, would benefit some stocks, industries and sectors more than others.
The industries that stand to benefit most from the lower rates are telecoms, transportation, retail and banks, analysts said.
But for some groups, such as tech and healthcare, the impact is more mixed.
Domestically geared healthcare companies that focus on services are poised to benefit from the lower tax rate.
Hospital operator Universal Health Services Inc (NYSE:UHS), lab-testing company Quest Diagnostics Inc (NYSE:DGX) and drug wholesaler Cardinal Health Inc (NYSE:CAH) are among the service companies set to benefit the most, according to Mizuho Securities.
“We believe tax reform should be a significant positive cash flow event, especially for healthcare services companies that tend to have limited international exposure and significant capital expenditures,” Mizuho analysts said in a research note.
While many large drugmakers already report adjusted tax rates in the low 20 percent range, a number of companies would benefit from the ability to bring back overseas cash, JPMorgan analyst Chris Schott said in a recent note.
According to Schott, Pfizer Inc (NYSE:PFE), with $160 billion in offshore earnings, and Merck & Co Inc (NYSE:MRK), with $70 billion, are particularly poised to gain from repatriating overseas funds.
Banks are expected to be among the biggest winners from a lower tax rate. The S&P 500 banks index .SPXBK has soared 9 percent since mid-November as the tax bill began moving swiftly through Congress.
Of the major S&P sectors, financials pay the highest effective tax rate at 27.5 percent, according to a Wells Fargo analysis of historical tax rates.
Large U.S. banks will see an average 13 percent increase to earnings per share from the lower rate, according to Goldman Sachs analysts, with Wells Fargo & Co (NYSE:WFC) and PNC Financial Services Group (NYSE:PNC) having the biggest gains.
Citizens Financial Group (NYSE:CFG) , Regions Financial Corp (NYSE:RF) and M&T Bank Corp (NYSE:MTB) would see sizable earnings benefits and are also poised to be relative winners among large bank stocks, UBS analyst Saul Martinez said in a recent note.
Banks could benefit indirectly if the tax bill provides an economic boost that spurs increased lending and higher interest rates.
The technology sector, which had led the market’s rally for most of 2017, has underperformed the S&P 500 as the tax bill moved forward in Congress.
Tech is expected to benefit less than most other sectors from a drop in the corporate rate, with an earnings boost of 5.3 percent, according to UBS.
Semiconductors, whose shares have had a particularly rough ride in the past month, are expected to see earnings drop by 3.3 percent due to the overall bill, according to UBS.
“Many chip companies have extensive international operations and relatively low blended tax rates,” Wells Fargo analysts said in a recent note. “We see the possibility of changes in the U.S. tax rules as a potential risk for such companies.”
One area where large tech companies could benefit is by spending cash held overseas for uses such as stock buybacks that boost earnings per share. UBS points to Cisco Systems Inc (NASDAQ:CSCO) and Qualcomm Inc (NASDAQ:QCOM) as companies that could see among the biggest buyback boosts.
“The tech sector would certainly be among the largest beneficiaries if cash stashed overseas can be repatriated at a low rate and presumably used for stock buybacks or dividends,” according to a recent note from Ed Yardeni, president of Yardeni Research.