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The top 5 blue-chip companies that are investing tax savings in their business, not their stock

The top 5 blue-chip companies that are investing tax savings in their business, not their stock

Just before Christmas of last year, Congress pushed the Tax Cuts and Jobs Act through, cutting tax rates for individuals and businesses on a large scale. At the time, President Trump predicted the tax savings would create new American jobs and raise wages. We’re now four months past the actual passage of the act, which means that enough time has passed to start seeing what actual effect lower corporate tax rates is having on the economy.

The opinions on how just how much average Americans would actually benefit have been widely disparate, with some analysts following Washington’s lead in predicting sweeping, far-ranging and immediate effects, while others took a more jaded view. The numbers so far aren’t as rosy as Trump and Republicans would have us believe. There is even an argument to be made that the cuts have really only encouraged corporate America to continue following the same pattern of “financial engineering” that they’ve been following, really for the last ten years. That means that instead of investing in research and development to keep innovating, creating new products and improving existing ones, big companies have been focusing on things like stock buybacks, consolidating their businesses with competitors, and emphasizing cost-cutting. And while those things aren’t categorically bad, they are reflective of a business attitude that is less about actual, homegrown fundamental growth than it is about the perception of it.

Here’s proof: as of the first week of April, a survey of companies that make up the Russell 1000 index showed that about 57% of corporate tax savings were being allocated for shareholder-driven purposes. These include things like share buybacks (decreasing the total shares outstanding reduces dilution, which generally props up price), direct distributions like dividend payments, or retained earnings. That’s a little less than two-thirds of an estimated $150 billion windfall for 2018 that workers and consumers won’t see.

In order for that massive, $150 billion in tax savings to really have the kind of long-term effect that was originally suggested, it makes sense that instead of simply giving the lion’s share of it, in one form or another, to a company’s shareholders, it should be put to use in a way that can help carry a business’ fortunes into the future. That means investing in improving existing products and developing new ones. It also means recognizing the importance of human capital, which gets reflected in things like increased wages and investment in employee develop and benefits.

It’s interesting that a majority of U.S. businesses to this point seem to be emphasizing shareholder benefit for their tax savings rather than business-focused investment. Wal-mart (WMT), for example, has publicized their intent to raise wages of hourly employees, but the truth is that more than 60% of their savings will be directed to shareholders. Other easily recognized companies like United Parcel Service (UPS), Pepsico (PEP), Bank of America (BAC), J.M. Smucker Company (SJM), Visa (V), Southwest Airlines (LUV) and Verizon Communications (VZ) are directing at least 90% of their savings towards shareholder benefits. It begs the question of what these companies are most interested in: making their stock price look good, or growing their business and market share with a long-term, productive and organic view in mind.

While this does seem to be a prevailing trend, there are a few companies that really stand out from the crowd about how they are using these newfound savings. From an investor standpoint, I think that what these companies are doing merits some extra consideration, since these are businesses that understand how important investing directly in their businesses, by focusing on employees, or consumers, or on a combination of both is for their long-term growth. Here are the top five. These companies are directing the entirety of their savings into their businesses rather than in temporarily enhancing their stock price.

Boeing Co. (BA)

As soon as the tax bill was signed into law, BA announced they were going to direct the $300 million of their savings into employee-focused initiatives. They broke them down into three categories:

  • $100 million for corporate giving, with funds used to support demand for employee gift-match programs and for investments in Boeing’s focus areas for charitable giving: in education, in communities, and for veterans and military personnel.
  • $100 million for workforce development in the form of training, education, and other capabilities development to meet the scale needed for rapidly evolving technologies and expanding markets.
  • $100 million for “workplace of the future” facilities and infrastructure enhancements for Boeing employees.

That’s 100% of the money the company is savings from their lower tax rate; they have directed exactly 0% of those funds into shareholder-related activities.

FedEx Corporation (FDX)

In stark contrast to their rival, UPS, FDX is following a similar theme as BA, by directing all of an estimated $3.2 billion in savings into employee and capital investment:

  • Over $200 million in increased compensation, about two-thirds of which will go to hourly team members by advancing 2018 annual pay increases by six months to April 1st from the normal October date. The remainder will fund increases in performance-based incentive plans for salaried personnel.
  • A voluntary contribution of $1.5 billion to the FedEx pension plan to ensure it remains one of the best funded retirement programs in the country.
  • Investing $1.5 billion to significantly expand the FedEx Express Indianapolis hub over the next seven years. The Memphis SuperHub will also be modernized and enlarged in a major program the details of which will be announced later this spring.

J.P. Morgan Chase & Co. (JPM)

JPM is taking a multi-faceted approach, with a particular emphasis on the products and services they can offer to customers. They announced a plan to spend more than $20 billion over the next five years, with the following breakdown.

  • Investing in employees with further increases to wages and benefits. Wages will increase 10 percent on average—ranging from between $15 and $18/hour—for 22,000 employees.
  • Expanding the branch network into new U.S. markets, leading to increased small business lending and philanthropic investments, and further support for local low-and moderate-income communities.
  • Increasing community-based philanthropic investments by 40 percent to $1.75 billion over five years.
    Increasing small business lending by $4 billion.
  • Accelerating affordable housing lending by (a) increasing mortgage lending in low-and moderate-income communities and (b) accelerating commercial lending to build affordable housing.

Their plan allocates 88% of their savings into their product portfolio (improving their ability to serve a larger customer base), and 12% into their employees.

The Kraft Heinz Co. (KHC)

This stock has been under pressure since early 2017, and in the last week that seemed to pick up as Warren Buffett stepped down from the board, a position he’s held for the last five years (Buffett indicated a desire for less travel rather than any issues with the company, in which Buffett’s Berkshire Hathaway still holds a 27% stake. That reality hasn’t prompted them to invest in “financial engineering,” however; instead they are focusing even more on product and employee development. In February, KHC’s earnings report included the announced allocation of about $2.4 billion into three initiatives:

  • $300 million in strategic investments to build their capabilities, people skills and brands.
  • More than $800 million in capital expenditures to improve quality, safety and capacity.
  • $1.3 billion to pre-fund their post-retirement benefit plans.

Their plan allocates about 27% of their savings into product development, and 73% into their employees.

Apple Inc. (AAPL)

Apple was one of the first companies, along with Boeing, to step up with a very specific plan for their tax savings. In January, they announced massive capital investment plans (more than $30 billion worth) over the next five years.

  • Creation of 20,000 new jobs through direct hiring at existing campuses, as well as opening a new one.
    More than $10 billion to be directed in data centers located throughout the United States.
  • An increase, from $1 billion to $5 billion, of their Advanced Manufacturing Fund, which supports innovation among U.S. manufacturers and helps others – both large and small businesses – establish a presence in the U.S.
  • Expansion of the company’s ongoing educational initiatives, including coding education at K-12 schools, summer camps, and community colleges all over the country, and new programs to support teachers and teacher training, as well as its ConnectED program.

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