Bank of America breaks down what could be the most effective use of the additional capital that corporations get from the GOP tax plan. The firm says that mergers and acquisitions is an ideal use, and could hit a record in 2018, while downplaying the positive effect of share buybacks and capital expenditures. At this point, everyone knows that the GOP tax plan is going to give corporations a huge windfall of cash to use. The real question now is how they’ll use that money. The equity strategy team at Bank of America Merrill Lynch boosted its 2018 profit growth forecast by 10% in anticipation of this influx of capital, and it has a few ideas about what might be the best use for it. And interestingly enough, BAML’s recommendation doesn’t match up with what many amateur observers expect. One of the most popular – and controversial – expected uses of tax proceeds is the practice of companies buying back their own shares. It’s a method that can spur stock price appreciation by simply reducing the number of shares outstanding, but it’s also something many skeptics have criticized for failing to boost the economy. In BAML’s mind, that debate is beside the point. They note in the chart below that buybacks haven’t been helping shares to the degree they once did. In fact, the cumulative relative performance of the companies that repurchase the most stock has declined since November 2013. OK, but what if those companies reinvested that money into… [Read full story]
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