Weekly Financial Market Update
—July 2, 2018
The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.
An Overseas Tsunami of Cash
The recently passed tax bill requires that overseas corporate earnings, which have yet to returned to the U.S., be taxed at 15.5% if held as cash/cash equivalents, and 8% if illiquid assets. Estimates vary on how much is held outside the U.S.
Bank of America Merrill Lunch (BAML) believes $2.5 trillion has accumulated since 1986. A recent estimate in Fortune suggests $3.1 trillion has been locked up overseas.
Why are the riches offshore? Prior to tax reform, companies were required to pay the 35% corporate rate on overseas earnings, even if already taxed by foreign governments. But the U.S. government allowed firms to defer paying taxes on offshore earnings until brought back— or “repatriated”— to the U.S.
Companies ultimately do what’s in their own best interest, and they left massive profits overseas.
Recently released data from the U.S. BEA suggests a major shift is happening thanks to tax reform. In the first quarter of 2018, companies repatriated over $300 billion back into the U.S.
It is an enormous amount of capital being injected into the U.S. economy. Some analysts see it as a major shot in the arm for economic growth; others aren’t so sure.
A survey by BAML of 300 S&P 500 companies last year revealed various expected uses for repatriated cash: 65% plan to pay down debt, 46% plan to buy back their own stock, 42% for acquisitions of other companies, 35% on capital spending, 29% on dividends, 12% on pensions, and 25% miscellaneous categories (multiple answers allowed).
Investment in new capital equipment would likely provide the biggest boost to the economy. Repayment of debt strengthens the balance sheet, while share repurchases and dividends may support investors.
Going forward, most overseas earnings will not incur a U.S. tax, even if immediately brought home. That provision is likely to provide long-term benefits to the economy, though such benefits may be difficult to immediately quantity.
Kyle Hurt MBA, CFP
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