Investors should consider which businesses will benefit the most from the new federal tax law when deciding what to buy and to sell.
The $1.5 billion Tax Cuts and Jobs Act passed by Congress and signed by President Trump in December 2017 does not treat all businesses equally, so investors seeking to profit from the change should look for public companies that focus on doing business in the United States and that typically pay the highest taxes. Telecommunications is one industry that should gain a heaping benefit from tax relief that drops the corporate tax rate to 21 percent from 35 percent, since several big companies operate mainly in the United States and buy capital equipment that will gain accelerated depreciation under the new law.
AT&T Inc. (NYSE:T) and Verizon Inc. (NYSE:VZ) are two U.S. telecommunications providers that will reap big savings from the new federal tax law. Both also pay dividends, with a forward yield of 5.25 percent for AT&T and 4.45 percent for Verizon, and each stock is recommended by Bob Carlson, the editor of the monthly investment newsletter Retirement Watch.
“I’ve had AT&T and Verizon in some of the portfolios, and they’ve done well,” Carlson told me.
The stock market’s biggest single-day point plunge in history on Monday, Feb. 5, dropped the Dow Jones Industrial Average to 24,345.75, down 4.6 percent, while clipping AT&T 3.78 percent to $36.36 and VZ 4.68 percent to $50.50. When combined with last Friday’s dip, the Dow slid 7 percent in just two days of trading before stabilizing on Tuesday, Feb. 6.
With the market slipping 8.5 percent since its Jan. 26 high, it is close to the 10 percent fall that would qualify as an official market correction that many forecasters had been expecting. Also showing signs of finding a short-term floor were both AT&T and Verizon.
Investors should keep in mind that dividend-paying equities typically fall less than non-dividend-paying stocks due to the income they provide to their shareholders. With that in mind, AT&T and Verizon may be safer equity investments right now than many of the high-risk, high-reward stocks that capture headlines but offer no income to investors interested in dividend payments.
AT&T’s effective tax rate was 32.7 percent in 2016, according to its annual report. The company announced on Jan. 31, when it released 2017 financial results, that passage of the new tax law will boost its 2018 incremental capital investment by $1 billion. The tax change also supported the company’s payment of over $200 million in bonuses to front-line employees and $800 million in voluntary funding of medical plans in fourth-quarter 2017, along with a $20.3 billion jump in fourth-quarter net income that included a rise of more than $800 million in adjusted net income.
AT&T’s proposed acquisition of Time Warner, announced in October 2016, would expand its video services that already include DirecTV’s satellite television and streaming capabilities. The company is bundling those services with its exiting traditional wireline, mobile wireless and landline telecommunication offerings.
Congress and the president took a “monumental step” to bring taxes paid by U.S. businesses in line with the rest of the industrialized world, AT&T’s CEO Randall Stephenson said in a statement.
Verizon CEO Lowell McAdam announced on Jan. 23 that he expects savings from the new federal tax law to add $3.5 billion to $4 billion to his company’s operating cash flow this year to lift earnings by 55 to 65 cents a share for 2018. The boost is in addition to a one-time $16.8 billion reduction in its net deferred income tax liabilities, which should boost Verizon’s earnings per share by roughly $4.10.
Verizon is looking to expand into new areas of business through acquisition to avoid depending solely upon telecommunications for its future growth. To that end, Verizon, the largest U.S. wireless provider, closed its $4.48 billion purchase of Yahoo Inc.’s core business on June 13, 2017.
Aside from the tax cut, telecommunications companies should benefit from a recent FCC decision to repeal net neutrality rules and let internet providers charge more to content companies to speed up delivery to certain websites, while slowing it down for users who do not pay a premium. Broadband service providers such as Verizon may find ways to boost revenues and earnings, if they stay out of the cross hairs of consumers who could be alienated if their internet speed is slowed.
The conservative Americans for Tax Reform released a list of more than 327 companies of various sizes that have announced plans to give more than 3 million workers bonuses, pay hikes or 401(k) increases due to the federal tax cut to 21 percent from 35 percent for corporations.
AT&T and Verizon are two of those companies, and they are publicly traded, pay enticing dividends and are seeking to find new ways to grow outside of traditional telecommunications services. Investors who like their new growth plans may be interested in considering them for investment with their reduced stock prices following the market’s pullback since Jan. 26.
Editor’s Note: Next week’s version of my weekly column will be sent under the name of Stock Investor Insights. Although the name and the banner on top will change, the column will remain focused on providing value-added information to help investors each week.