Yahoo Finance Tax Reform and Corporate Bonuses: What's the Real Impact?
Dozens of U.S. companies are making headlines this month by increasing wages, providing bonuses and raising employee retirement fund matches in the immediate aftermath of the tax reform legislation's passage.
Among the most notable are BB&T Corp. (NYSE: BBT), which handed out $1,200 in bonuses to 27,000 staffers and hiked its minimum wage from $12 to $15 per hour; Wal-Mart Stores ( WMT), which increased its starting wage from $10 to $11 and issued bonuses from $200 to $1,000; and Southwest Airlines ( LUV), which delivered immediate $1,000 bonuses to its 55,000 employees and gave $5 million to charities.
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"We are pleased that these tax reforms provide Aflac with an opportunity to increase our investments in initiatives that reflect our company values, providing for our employees in the long and short term, ensuring future growth for our company and giving back to the community," said Dan Amos, chief executive officer at Aflac ( AFL).
The financial windfall supports President Donald Trump's assertion that corporate tax cuts are good for American workers. But are they also good for company stocks?
No big short-term gains. There's no exchange-traded fund that tracks companies that are doling out cash to employees and charities because of tax reform. It's also worth noting there are other big factors that impact company stocks besides being generous with corporate cash coffers these days.
That said, how are the stocks of suddenly generous companies like Aflac, Southwest and others doing with tax reform benevolence since Trump signed the tax bill on Dec. 22?
BBT stock moved higher in the last week and now shows a 5.3 percent gain since the tax bill was signed. Aflac fared nearly as well, up 5 percent, which beats the Dow Jones industrial average gain of 3.6 percent for the same period. Walmart was up about 3 percent, while Southwest was down 0.5 percent.
There should be long-term rewards. OK, that's a small study sample, and certainly, tax reform's impact will be measured in years, not weeks. But it does point to little or no impact that company generosity after tax reform has on company stocks -- or does it?
"My first instinct is that I don't think that cash gifts will move the needle that much," says Christian Greiner, CFA and portfolio manager at the Azzad Ethical Fund, in Falls Church, Virginia. "A lot of these (gifts and contributions) are one-time bonuses. The actions where companies raise their minimum wages are much more interesting, but is tempered by the question of how many employees were working for that wage all along."
Taking a longer view, Greiner is more charitable about tax reform and company stocks.
[See: 7 ETFs to Profit From Recent Tax Cuts.]
"All and all, it is still good for both shareholders and employees," he says. "Lower-wage employees get a boost that helps their real earnings catch up after lagging for so many years. Shareholders might see long-term benefits from retaining skilled workers and lower turnover costs in a full employment environment."
Other market gurus have a similar view.
"Companies are passing through some of the financial benefits of tax reform to their employees in an effort to retain talent, which they believe will help them achieve long-term growth and stability," says Ford Donohue, senior investment analyst at Homrich Berg, a wealth management firm in Atlanta. "If there's any impact to stocks, it would be through improved long-term productivity, but the one-time expense should otherwise have little impact on the company's stock."
Still, it's not wise to sell short companies that fulfill the urge to share their tax savings largesse with employees, charities and even shareholders. It's simply good business, and that's good for stock prices, other experts say.
"It's true that corporations will benefit from the lower corporate tax rates, and people have been critical of this scenario," says Mac Clouse, professor of finance at the University of Denver's Daniels College of Business. "What these corporations are doing is good for their employees, good for the economy and good for their reputations as employers, and there still should be dollars left for new corporate investment."
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And that can have a positive effect on corporations' stock, Clouse says. "Some people critical of the tax rate reductions have argued that the corporations would just use the dollars to buy back shares and pay dividends," he says. "These corporations are showing that they may not do that, at least not to the extent that the naysayers predict."
The takeaway? It seems that doing good by treating employees and charities translates well and, in the long-term at least, is a savvy, social justice-oriented business move by cash-flush companies.
Who knew tax reform might lead to that outcome?
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