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3 Companies That Could Win Big With Trump Tax Reform

By Matthew Cochrane - Mar 4, 2017 at 1:07PM

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If President Trump's corporate tax reform is passed, a lot of American companies might be big winners. These three, however, might be among those that benefit the most.

When running for president, one of Donald Trump's "big league" promises was to lower the corporate tax rate to a flat 15%. Part of the thinking behind the proposal is that lowering the corporate tax rate will entice corporations considering leaving the country to stay and give American companies a more level playing field to compete with the rest of the world. In early February, Trump reiterated this idea, saying that his administration would soon be announcing something "that will be phenomenal in terms of tax."

Given that Republicans control Congress and are generally open to the idea of lowering taxes, it stands to reason that sometime in the next year or so there is a good chance corporate taxes will be lower than they are today.

While it is true that a rising tide lifts all ships, shareholders of some companies will certainly profit more than others if such a scenario comes to pass. In looking for the winners, one wants to eliminate companies that subsist on write-offs, amortization, and other loopholes and instead focus on cash-flow-rich companies where any tax reduction could flow straight into shareholders' pockets. While there are certainly many such winners in this game, here are three that seemingly offer ideal circumstances.

The right medicine for this ailing drugstore retailer

Shares of CVS Health Corp (CVS 1.38%) have dropped significantly over the last year for a variety of factors. These range from political concerns over the relationship between the high cost of prescription medications to CVS's pharmacy benefit manager (PBM) segment to losing out on important contracts last year to arch-rival Walgreens Boots Alliance.

CVS pharmacist talking to elderly female customer in aisle

Image source: CVS Health Corp.

Because of the company's dominant domestic footprint (more than 9,600 locations in 49 states, Washington D.C., and Puerto Rico), CVS also sports one of the highest effective tax rates in the country. In the most recently reported quarter, its effective tax rate was 38.5%. This weighs heavily on the stock's performance. One of the brightest spots during the company's last conference call occurred when CEO Larry Merlo addressed potential corporate tax reform. From the S&P Capital IQ transcript of the conference call, Merlo stated:

As you know, we are at the highest end of corporate taxpayers given our domestic profile, with an effective rate around 39%. And the details of tax reform certainly will matter. And today, while there's a lot of discussion, nothing has been reduced to writing. But suffice to say that a fair tax code that includes a meaningful reduction in the effective corporate tax rate would allow CVS to unlock even greater economic opportunities.

Make room in your saddlebags for more profits

Though still well off its all-time highs, shares of Harley-Davidson Inc (HOG 1.04%) have risen about 40% the past year. Not too shabby! The stock also offers a decent dividend yield of 2.5% for patient investors. The iconic motorcycle manufacturer saw its 2016 effective tax rate drop all the way down to 32.5%, but expects it to inch up to 34.5% in 2017 if nothing changes. That's high!

When asked a question about "proposed policy changes" during the company's most recently reported conference call, CFO John Olin said management believes that "Harley Davidson is extremely well-situated" because the "vast majority of everything is made in the United States, manufactured in United States and exported."

Man riding a Harley-Davidson motorcycle on street

Image source: Harley-Davidson Inc.

Shareholders could very well see any money saved from taxes returned directly to them. This past year, management increased the dividend by 12.9% and repurchased almost ten million shares.

Just one more catalyst for this global payments network

Investors in Visa Inc (V 1.16%) have been amply rewarded for holding onto this gem of an investment. Shares are up almost 20% in the past year and more than 13% year to date. This strong price action has been fueled by strong business fundamentals. In its most recently reported quarter, adjusted EPS grew 23% and net operating revenue increased 25% year over year.

Customer making a purchase with their Visa via a smartphone app

Image source: Visa Inc.

In the same conference call, Visa announced its tax rate was 30.5%. While this rate isn't as high as the other companies highlighted in this article, it could still save a hefty sum if corporate tax reform is passed later this year. Beyond the obvious savings, however, Visa management is already rethinking how potential tax reform can buttress its balance sheet. Visa CFO Vasant Prabhu stated it did not issue $2 billion in debt as planned, because "We have over $8 billion of offshore cash, which could be repatriated if it can be done tax efficiently. We will wait to see what the new administration's plans for committing cash repatriation are before we issue longer-term debt."

This means Visa might not only benefit from a substantially lower tax rate but a stronger balance sheet from less debt as well. Coupled with the company's strong business fundamentals, this adds up to another win for investors looking for ways to profit off from Trump's proposed policies. 

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Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
$93.94 (1.38%) $1.28
Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
$31.99 (1.04%) $0.33
Visa Inc. Stock Quote
Visa Inc.
$199.18 (1.16%) $2.29

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