These U.S. Companies Have The Most Cash Parked Overseas

While many US companies, especially those in the Russell 2000, have seen their stocks surge in recent days on renewed hopes that Trump tax reform may pass in the coming months (Goldman assigned a 65% probability of Trump tax passing), the reality is that for a vast majority of US corporations a tax cut to 30% or even 25% will have little marginal impact: after all, while US companies may have some the highest statutory tax rate in the world...

... the effective tax rate of the median S&P 500 company is 12% below the statutory rate, or roughly 27%:

Yet one aspect of the upcoming tax law change - if it passes - that would certainly boost US corporate bottom lines, is if the IRS grants an offshore cash repatriation holiday (or even one penalized by a nominal tax). It is here that most companies will promptly take advantage of the new rules to repatriate cash, and use it not to hire more workers or spend on capex, but "invest" in dividends and buybacks.

As Bank of America writes in a recent report, a major boost to S&P 500 EPS would come from the repatriation of the $1.2tn in cash overseas, excluding cash held by Financials and Managed Care companies - which may require a significant portion of their overseas cash for their foreign operations.

The proposal recommends a one-time mandatory tax, not just on cash held overseas, but on all accumulated foreign earnings on which US taxes have not been paid, whether or not this cash has been spent. While the latest tax reform plan did not specify a repatriation tax rate, the prior proposals suggest that the tax rate on overseas cash would fall in the neighborhood of 8.75% (Blueprint) and 10% (Trump). The Blueprint proposal had additionally specified a reduced 3.5% tax rate on non-cash accumulated foreign profits.

And while it is true that a substantial portion of this overseas "cash" is not really but has been invested in securities, many of which are US based, using offshore tax havens, depending on the magnitude of the final tax, Treasurers may just have the incentive to liquidate existing asset holding, in order to shore up their domestic balance sheets, and use the cash at will, instead of being landlocked like Apple which is forced to issue new debt every time it wants to buyback stock.

Next, some math: assuming that companies spend half of the freed up cash to repurchase shares, this would, according to Bank of America, represent $3 of EPS accretion. Given their high overseas cash balances, Tech and Health Care would benefit most from the repatriation tax holiday, and these sectors could buy back 6% and 3% of their shares, respectively.

Indicatively, during the last repatriation holiday in 2004/05, a much higher proportion (~80%) of repatriated cash was used on buybacks. That said, most banks assume a 50% repatriation today, for several reasons including 1) more elevated corporate leverage. 2) higher valuations today, 3) top-line growth finally materializing, and 4) investors increasingly agitating for capex over other forms of cash.

So with that in mind, here is a) the list of companies with the most retained foreign earnings (i.e. overseas cash) ...

... and, more informatively, b) the companies that have the largest proportion of offshore cash as a percentage of market cap (and in this case the foreign cash is at least 5% of market cap): these would be the biggest beneficiaries of the repatriation "holiday", and as expected, tech and healthcare companies are by far the biggest winners.