Thursday, January 11, 2018

Trump's new tax rates and my portfolio

One may have their own personal opinions about Trump. But one thing is certain. He is making me a lot of money at the moment. He is a businessman and his approach to running the White House definitely is benefiting big business. When businesses succeed, the owners of those businesses (the shareholders) succeed. I expect large dividend increases, M&A, earnings expansion, and large buy backs in the coming months or years.

Under the new president, tax rates are now 22% (or something much lower) compared to the high 30%s that used to burden USA businesses. I ran through my portfolio checking what the average taxes paid for each my companies are. The numbers are averages, and I tried to ignore one time expenses or charges (one offs).

I found a lot of companies that are centered in the USA (not so much international) will benefit severely from this tax change. I expect they will profit handsomely and my price targets have changed quite drastically for these names. A lot of these are brick and mortar, utilities, restaurants, or companies that operate solely in the US and are based in the US (no shady tax dodging overseas setup).

Name Ticker Sector       Value   Weight        Divies      Yield Tax Rate
TJX Companies Inc TJX Discret $6,297.55 1.45% $102.39 1.6259% 38%
WEC Energy Group, Inc. WEC Utilities $3,886.67 0.90% $135.10 3.4759% 38%
Ross Stores Inc ROST Discret $15,017.97 3.47% $116.42 0.7752% 37%
Home Depot Inc HD Discret $24,501.88 5.66% $448.05 1.8286% 36%
Visa Inc V Financial $23,736.68 5.48% $154.49 0.6509% 36%
Altria Group Inc MO Staples $37,889.92 8.75% $1,423.10 3.7559% 35%
Southern Co SO Utilities $2,669.53 0.62% $136.87 5.1271% 35%
Church & Dwight CHD Staples $7,423.49 1.71% $114.28 1.5394% 34%
Xcel Energy Inc XEL Utilities $7,395.83 1.71% $233.96 3.1634% 34%
AT&T Inc T Telecom $10,904.35 2.52% $597.83 5.4825% 33%
Starbucks Corporation SBUX Discret $7,574.30 1.75% $151.49 2.0000% 33%
McDonald's Corporation MCD Discret $5,647.95 1.30% $131.60 2.3300% 33%
Dominion Resources, Inc D Utilities $8,302.07 1.92% $335.53 4.0415% 32%
Automatic Data Proc, Inc ADP Tech $8,290.95 1.92% $178.30 2.1505% 32%
Clorox Co CLX Staples $6,891.90 1.59% $163.09 2.3664% 32%
Colgate-Palmolive Co CL Staples $4,672.54 1.08% $100.28 2.1462% 32%
General Mills, Inc. GIS Staples $3,782.93 0.87% $127.64 3.3741% 32%
NextEra Energy Inc NEE Utilities $16,860.53 3.89% $440.28 2.6113% 31%
Kimberly-Clark KMB Staples $8,717.29 2.01% $300.12 3.4428% 31%
Mastercard Inc MA Financial $12,788.33 2.95% $79.47 0.6214% 30%
Illinois Tool Works Inc. ITW Industrial $8,468.05 1.96% $156.33 1.8462% 30%
General Dynamics Corporation GD Industrial $3,288.16 0.76% $53.76 1.6350% 30%
Philip Morris International Inc PM Staples $34,320.42 7.93% $1,400.83 4.0816% 28%
3M Co MMM Industrial $13,252.73 3.06% $257.06 1.9397% 28%
Kraft Heinz Co KHC Staples $5,001.72 1.16% $162.12 3.2413% 28%
McCormick & Company MKC Staples $11,956.95 2.76% $246.24 2.0594% 27%
Becton Dickinson and Co BDX Health $17,517.72 4.05% $232.72 1.3285% 26%
PepsiCo PEP Staples $15,822.45 3.65% $435.90 2.7550% 25%
Abbott Laboratories ABT Health $3,556.11 0.82% $67.56 1.8999% 25%
Procter & Gamble Co PG Staples $9,243.78 2.14% $283.00 3.0616% 23%
The Coca-Cola Co KO Staples $8,417.12 1.94% $270.58 3.2146% 23%
Air Products & Chemicals, Inc APD Materials $5,987.53 1.38% $133.86 2.2357% 23%
Johnson & Johnson JNJ Health $26,849.50 6.20% $623.07 2.3206% 19%
Medtronic plc MDT Health $8,211.31 1.90% $176.24 2.1463% 18%
Stryker Corporation SYK Health $4,616.59 1.07% $54.72 1.1854% 17%
Realty Income Corp O REIT $13,619.44 3.15% $651.83 4.7860% 1%

I think this corporate tax policy will benefit greatly all corporations that are over 30% tax rate which is the majority of the portfolio. From 36% to 22% tax rate is a huge boost to margins. That extra money is such a huge windfall for these large companies that opens the doors for numerous possibilities for growth. I expect a huge spike in earnings and this will likely result in more expansion, M&A, higher dividends, and large buy backs. All excellent for shareholders! Companies that are based overseas with low taxes (like MDT) or not tax impacted (like REITs) will not benefit.

There seems to be a large sector rotation away from defensive names (like staples and utilities) and more towards super cyclicals, think industrials and energy and materials and discretionary and technology. This has led to a lot of companies I consider Core to fall back to levels I am particularly interested in, especially considering the major tax cut. I am specifically eyeing the Staples and Utilities sectors, but will consider minor additions to other sectors.

Happy investing


  1. Great post YD. I think you are right on. I'm looking forward to solid dividend increases in 2018 due to the tax law. MDT is an interesting case. They relocated overseas for tax purposes and you can see the benefit in their tax rate. The new law does level global playing field for US based companies. Tom

  2. I'm unsure of just how much benefit the tax cuts will provide for shareholders, well in the form of dividends. I think some companies will be reluctant to boost their dividends too high after the tax cut because dividends are sticky. However, I do think share buybacks are going to be greatly increased. The reason for my expected hesistancy regarding outsized dividend increase, other than maybe special dividends, is because the fiscal situation for the government isn't exactly stellar so tax increases on businesses could very well be on the horizon. Of course raising taxes on businesses probably won't go over well considering the US is now competitive, at least from a tax standpoint, with most of the global economy. Time will tell though and the big thing is coming up with a plan and then sticking to it for your long term investing.

  3. Great looking portfolio, YD! I need to force myself to learn more about taxes. I feel the government tries to make the subject complicated and boring to take advantage of it's people. As someone who has some "skin in the game" I am excited the companies will benefit from tax breaks and then reward its shareholders. At least, for a little while.

    Good Luck in 2018!

  4. Good post, YD. I haven't seen any blog posts tackling this subject so it was nice to see that you did it for your portfolio. We've heard lots about the high tax rates on American companies, so it's interesting to see the tax spread with regard to the decent number of companies you hold. Thanks for putting it together and then sharing it.