20171110-NATIXIS-How_will_US_companies_use_additional_profits__6页_622kb

Flash Economics Summary: How US Companies Will Use Additional Profits

Core Content

The document discusses the likely impact of a reduction in the US corporate tax rate on company earnings and how these earnings are expected to be utilized. It provides an analysis of corporate behavior in response to tax cuts, focusing on investment and shareholder distribution.

Main Views

1. Impact of Tax Cut on Corporate Earnings

• A reduction in the corporate tax rate (from 35% to 20% or 25%) is expected to significantly increase after-tax earnings.
• A one-third tax cut would result in a 5% increase in earnings before dividend payments.
• This increase is likely to lead to a reduction in the forward price-to-earnings (PER) ratio of the S&P index from 19.5 to 18.5, which is considered more acceptable.

2. Corporate Investment Outlook

• It is unlikely that US companies will use the additional earnings to increase investment.
• Reasons include:
  • The US is at the end of the expansion cycle, reducing the incentive to invest.
  • Corporate investment levels are already high relative to growth.
  • The self-financing rate (ratio of cash flows to investment) is high, indicating no financing constraints.
  • Capacity utilisation is low, meaning additional investment is not needed.

3. Shareholder Distribution Likelihood

• The increase in earnings is more likely to be distributed to shareholders through:
  • Higher dividends.
  • Share buybacks.
• This is supported by:
  • Strong investor demand for cash returns.
  • Persistent underperformance of return on equity (RoE) compared to pre-crisis levels.
  • The need to validate high equity valuations in the US market.

Key Information

• Tax Rate Cut: Likely to reduce from 35% to 20% or 25%.
• Earnings Impact: After-tax earnings are expected to increase by 5% with a one-third tax cut.
• Investment Behavior: Companies are unlikely to boost investment due to high current investment levels and low capacity utilisation.
• Shareholder Returns: Increased dividends and share buybacks are expected, which will support the US equity market.
• Equity Market Boost: The tax cut is predicted to benefit the US stock market rather than drive economic growth.

Conclusion

The document concludes that the reduction in the US corporate tax rate is more likely to result in a boost to the equity market through increased shareholder distributions rather than a significant increase in corporate investment or economic growth.

Disclaimer Highlights

• The document is intended for professional and qualified investors only.
• It is confidential and must not be disclosed to third parties without permission.
• It does not constitute a financial analysis or personalized investment recommendation.
• No liability is accepted for the information provided.
• The views expressed are those of the authors and may differ.
• The document is subject to regulatory oversight in various jurisdictions, including the ECB, ACPR, FCA, BaFin, and others.

Regulatory Information

• Supervision: Natixis is supervised by the ECB and regulated by various authorities in France, the UK, Germany, Spain, Italy, and the UAE.
• Authorization: Natixis is authorized to provide investment services in multiple jurisdictions.
• Legal Compliance: The document is not developed in accordance with legal requirements to promote the independence of investment research.

This summary provides a concise overview of the document's key points and implications for US corporate behavior and the stock market in the context of potential tax rate reductions.