Investors target 'buyback stocks' in bet on Trump tax plan

Rather than waiting to see how the Republican tax bill will fare in Congress, some investors are already picking out gingerly technology, healthcare and consumer companies they expect to use potential tax savings to buy back more of their own stock.

Fund managers are adding to or holding on to their shares of those of companies such as Texas Instruments Inc (O:TXN), Microsoft Co (O:MSFT) and Southwest Airlines Co (N:LUV) in part because they expect to see more share buybacks or special dividends if a tax reform passes in some form.

The House Republican plan would cut corporate taxes to 20 percent from 35 percent and allow companies bring back foreign profits at a 12 percent tax rate, a process known as repatriation. Overall, U.S. companies hold some $2.6 trillion in untaxed offshore cash.

Fund managers say that while it is far too soon to tell whether the tax bill will pass, the prospect of increased buybacks is worth taking a bet on companies that would benefit the most from the plan.

When Congress allowed U.S. companies to bring back foreign profits at a discounted tax rate in 2004, Microsoft issued a special $3-per-share dividend and the Trump tax windfall would likely lead to something similar, Santoro said.

Goldman Sachs (NYSE:GS) estimates that the Republican tax bill would increase corporate buybacks by $75 billion, to $590 billion, in 2018. Bank of America Merrill Lynch (NYSE:BAC), meanwhile, estimates about half of repatriated cash would go into buybacks and the rest would get spent on acquisitions and other investments.

Stock buybacks often provide a short-term bump in a company's share price both by eliminating the total number of available shares and improving metrics such as earnings per share and return on equity.

Yet buybacks, which peaked in 2016, have been slowing over the last three years as rising stock valuations made them more costly and investors have called on companies to invest more in their future by spending on factories or research.

Texas Instruments, for instance, said in September it would buy a further $6 billion of its own shares, extending a program that has reduced its total number of shares by a quarter over the last five years. Texas Instruments shares make up about 2 percent of the Hodges Blue Chip Equity Income fund. The firm last bought the stock in June, according to the latest publicly available data.

"Buybacks are the most tax efficient thing you can do with your capital, and when you are repurchase your own stock you know exactly what you are buying," Marshall said.

Bloomberg

Read more:

• Peter Boockvar: Stocks to retest correction lows as easy money disappears
• Europe markets lower as geopolitical concerns deepen
• There may be a ‘fantastic’ buying opportunity after the New Year, expert says
• How much market experts expect stocks to rise next year
• Strategist Jim Paulsen makes case for why stocks are about to hit record highs