Corporate America Responds To Trump With Tempered Enthusiasm: Tax Reform, Regulation

by: Michael Swierczek, CFA

Summary

Executives are anxious to work with President Trump, meeting him with tempered enthusiasm and optimism, but ultimately taking something of a “wait and see” approach.

Enthusiasm stems primarily from 2 areas: tax reform and regulatory reform.

Tempering enthusiasm are uncertainty around what reform will look like, continued low expectations around economic growth, and concerns over trade and immigration policy.

Market reaction since the election has been mostly consistent with corporate comments, but has shown less restraint, up nearly +7%.

See below for thoughts from nearly 2 dozen executives on the new administration.

As your day-to-day life may be consumed with feelings of hope or despair regarding the new Trump Administration, fed by a constant bombardment from 24-hour news networks, Twittervese, politicians, Facebook feeds, dinner conversations, protests and rallies on your local streets or international airport (all stirred by a chaos-loving Commander-in-Chief himself), you may have understandably missed how corporate America has responded to the new President. At least in a public sense, U.S.-companies are historically hesitant to jump in too deep to partisan politics, often remaining on the periphery, talking up their business's attributes and letting the politics fall where they may. In many instances that's still the case; however, as we're now in the heart of earnings season while at the same time dealing with a transition in the Oval Office, the temptation (and pressure/bait from analysts) has been too great for many to ignore.

After reading through dozens of earnings call transcripts from America's leading companies, some clear patterns emerge, primarily that companies are:

  1. Very excited about tax reform. Verizon (NYSE:VZ) CFO Matt Ellis states "We certainly are supportive to changes in the tax legislation, we believe that we need to get to a more competitive tax environment and we look forward to working with congress and the new administration as Trump put new tax rate forward."
  2. Optimistic and very much in favor of a reduction in the regulatory environment. UPS (NYSE:UPS) CEO David Abney states that "reduction of Federal regulations will also make the U.S. economy more vibrant"

Companies overall seemed to paint a picture of tempered enthusiasm. "Enthusiasm" was being driven by how their companies (and investors) could directly benefit from the dual drivers of tax and regulatory reform. From their earnings calls, these are two themes that showed up again and again. There was also some genuine appreciation for the degree to which the President was focused on business issues, as well as some lukewarm optimism in regard to repatriation.

This excitement was somewhat "tempered" by a variety of other factors, including:

  1. Uncertainty regarding what, when, if and how these drivers might come to pass. Companies are particularly concerned with what a potential border tax adjustment may look like. Chevron Corp (NYSE:CVX) CEO John Watson states "the border adjustment concept is complex and I would agree with that. And so I think we need to take a close look at perhaps the consequences of that both some of them could be positive and the unintended consequences"
  2. Continued low growth expectations - Some companies expressed muted optimism around a potential stimulus, but most companies didn't note meaningful economic acceleration under the new administration. AT&T (NYSE:T) CFO John Stephens says "some are speculating that the economy might grow faster, and there will be an uptick in business fixed investment. That would definitely be good for us. And we are waiting to hear for the final outcome of the first of that process."
  3. Trade - which seemed to be almost a nonfactor for companies. Executives insist their businesses can weather changes in trade policy based on the strength of their business. Companies favor free trade, whether multi-lateral of individual, but most of America's leading corporations feel they are large enough to deal with any changes they could foresee. Some executives noted that smaller companies (without global operations/relationships) could be more negatively impacted. Boeing (NYSE:BA) CEO Dennis Muilenburg states "I think it's really important for all of us to understand that healthy trade relationships between the U.S. and China are important. I'm very confident that the incoming administration understands that. "
  4. Immigration - While few companies touched on this in their earnings calls, many have sent memos to employees or commented on it publicly. The New York Times complied a great list of how companies were responding. Overall, companies are acting with a responsibility to their employees regarding immigration, many of whom may be subject to restrictions with the new Executive Order. Companies have overwhelmingly pushed back on the order either defending their employees or the impact it could have on their business by either being able to attract/retain employees or conduct business. I'd also encourage you to watch GE (NYSE:GE) CEO's Jeffrey Immelt's wide ranging discussion with Bloomberg regarding many challenges and opportunities presented by the administration.

Market Reaction Since Election Mostly Consistent With Corporate Comments, But Showing Less Restraint

Equity markets have reacted with enthusiasm as well, but may have gotten ahead of themselves. The S&P 500 is up 6.5% since the U.S. election. The consensus opinions across the investment community has been that the market is being driven by hope and not fundamentals. Hope is primarily attributed to increased growth prospects due to 1) tax reform, 2) decreased regulations, and 3) stimulus spending. This closely mirrors the comments that we're hearing from executives.

Within the overall equity market increase, there have been clear industry winners and losers. In the month after the election, financials and energy stocks increased double digits, while health care, consumer staples, and utilities all declined. Since then we've seen some mean reversion, as tech and real estate stocks have been the best performing since early December (both laggards in the month after the election), and financials and energy stocks have been the two worst performing sectors. 10 year yields increased 74 bps in the weeks after the election, but have since fallen approximately 13 bps in the month and a half since.

Inflation has been a driving variable behind much of the divergent stock moves. Essentially everything Trump has done or proposes to do is inflationary: tariffs, stimulus, even a decreased regulatory environment for banks loosening lending. Inflation was already on the radar with a tight labor market and steady growth, but expectations have risen under Trump. That's caused the spike in rates (increased inflation leads to increased rates), which has been a boon to asset sensitive financial stocks (higher rates and more lending allows banks to make more money), and has hit dividend paying stock sectors hard (utilities, real estate). Yet there's almost no talk of inflation from corporate executives. As interest rates rise, it's likely that a stronger dollar will follow, which is a headwind to earnings, especially to those companies with a more global reach.

Tempered Enthusiasm, Optimism, and a "Wait and See" Approach From Executives

In this first earnings season under the President, executives are anxious to work with President Trump, meeting him with tempered enthusiasm and optimism, but ultimately taking something of a "wait and see" approach. They expect Trump to shake things up and end the status quo, but are ultimately uncertain just what exactly the new sheriff in town will bring. At this point, they are encouraged by a President that comes from the business world, and is willing to create a dialogue with them, leading many to the hope that they'll be able to better influence policy. Whether that is ultimately true is very much yet to be seen, and managements realize this. Yet they see change coming, and until they realize what that change will entail, they want to be careful to influence it where they can, and not end up on the wrong side of it with public comments. This condition is likely to continue over the next few earnings seasons as things like tax and comprehensive regulatory reform are complex, in many cases will require deep negotiations with Congress, and won't happen overnight. Uncertainty should clear up as we move into the back half of the year.

A Further Sampling of Quotes Regarding the New Administration from Corporate Executives This Earnings Season

Discussion of Tax Reform & regulations (my italics below)

T: Randall Stephenson, CEO 1/15/17:

I had the opportunity to meet with what was then the President-elect couple of weeks ago, and I got to say I was impressed. I was meeting with the CEO, it was obvious. And the President had a very specific agenda in terms of what he thought was critical, and that was tax reform and regulatory reform, and we spoke at length about each of those. And I would tell you that the man, the President is focused on these. And so, laughed with a degree of optimism that this could actually be pulled off this year.… We have the most uncompetitive tax structure in United States, it's the highest tax rate in the developed world in the United States. And to bring that into competitive levels…will have a stimulative effect, we're convinced.

T: John Stephens, CFO, 1/15/17

Our business always has had a lot of moving pieces, but with the new administration taking office, there is even more to think about this year. It's just too early to call the impact of several issues. Tax reform has been a hot button and it makes sense for the company our size with the taxes we pay, would clearly have an opportunity to benefit from the change in tax rate. We're also staring at the potentially better regulatory environment. Positive change in both of these areas would help us deliver faster on plans to innovate and grow our business. Some are speculating that the economy might grow faster, and there will be an uptick in business fixed investment. That would definitely be good for us. And we are waiting to hear for the final outcome of the first of that process.

Morgan Stanley (MS): James Gorman, CEO, 1/17/17

The bear case would be the retail investor doesn't engage, there's a geopolitical or political event which creates enough confusion in the minds of potential issuers that the underwriting calendar doesn't come back, the M&A pipeline for whatever reason does not crystallize, given some of the changes on the political front, including potential tax reform, et cetera.

Citigroup (NYSE:C), Mike Corbat, CEO, 1/18/17

What I read the administration is trying to do is create the right level playing field. So that U.S. companies have the ability to compete and if there are things whether it's Mexico or elsewhere in the world that aren't there, they should be re-examined … So early to tell but again the stance the administration is taking we think is workable from what we've heard and again we maneuver these types of things before and we think we've got the ability to work with them in the future.

Goldman Sachs (NYSE:GS), Harvey Schwartz, CFO, 1/18/17

We've been a relatively high tax payer and so if tax rates come down. We're a beneficiary but obviously changes in tax policy can be a huge catalyst for how all of our clients think about deploying their capital strategic decisions and so that's board room dialog which obviously we're always front and center to…I think it's very difficult to quantify just like it was difficult to quantify in 2012, 2013, 2014 how concerns around deflation and low economic growth will impact activity in a number of businesses. I think it's very difficult to quantify how increased optimism. You know we like to say in some respects, confidence is the best stimulus. And the extent to which we enter a period of increased confidence with respect to economic growth, physical policy, you mentioned tax policy, I think there could be a lot that happens. Now we'll have to see all these policies of ours. But who knows we could be at the beginning of a long term trend, we may not be. Again it was difficult to predict things in 2012 and how they will be in 2013, 2014 and 2015.

Texas Instruments (NYSE:TXN), Kevin March, CFO, 1/24/17

We look at the talk of stimulus with some anticipation of the positive boost to the economy, but frankly we think it's probably too early to figure out what that might be and how might manifest it itself. A lot of that stimulus seems to be focused towards infrastructure, and so if in fact just wind up there that with the further benefit on our industrial portfolio. More important to us as to watch what's happening on the tax front, and hopefully we will finally get some tax relief out of Washington, which will be a significant benefit to our shareholders.

Johnson & Johnson (JNJ), Alex Gorsky, Chairman and CEO, 1/24/16

Yesterday I had the honor of meeting with the President and the new administrations and we had a productive conversation about accelerating growth in jobs in the United States. We look forward to continuing that dialogue and while it's still too early to speculate about the impact of changes to existing US health policy or potential changes to the US tax codes….We are very encouraged by the proposals currently in discussion and we will support business tax policy that is competitive with most developed countries and encourages innovation and growth. This includes a system based on territorial taxation in line with most economically developed nations. We also believe that there should be incentives for innovations such as research and development and the cash currently held abroad should be allowed to be brought back into the US at a more competitive tax rate.

STX: David Morton, CFO, 1/24/17

We do believe that the most serious tax proposals being considered, including the House Republican Blueprint with its border adjustability tax provision would not likely have a significant near-term impact for the company. But again, that's still under heavy review.

VZ: Matt Ellis, CFO, 1/24/17

We certainly are supportive to changes in the tax legislation, we believe that we need to get to a more competitive tax environment and we look forward to working with congress and the new administration as Trump put new tax rate forward. Certainly a reduction rate would be beneficial, 100% expansion of CapEx would be beneficial initially, but ... it's a little too soon to say exactly how much that could be.

BA: Dennis Muilenburg, CEO, 1/25/17

President Trump is very much engaged with business. We've had the privilege of having a very open dialogue with him on business issues, and all of the actions that are being taken around things like tax reform, regulatory reform, focus on trade policy, those are all things that are going to allow us to grow economically and ultimately allow us to grow and add manufacturing capacity in the U.S. So we are very supportive of those actions, very confident that those are headed in the right direction and being done with the right tone and tenor.

CVX, John Watson, CEO, 1/27/17

First, in an overall sense I've been very pleased with the agenda that the Trump administration has. We've seen an avalanche of regulation over the last decade and putting a much, much more balanced cost-benefit framework in place to assess the value of those regulations freeing up infrastructure pipeline, all of that is quite positive for our business for the country job creation and a lot of things. So that is very much a positive and we all know that our tax system is not competitive...President Trump has indicated that the border adjustment concept is complex and I would agree with that...But I think we need to have a little patience for the different ideas that are being put out there and hopefully we'll get to the right outcome.

Eli Lilly (LLY): David Ricks, CEO, 1/31/17

We had a good meeting with the President this morning. It was a broad-ranging discussion.…We touched on lots of things, tax, regulation, as well as the healthcare repeal/replace discussion. So there's a number of follow-ups that were cited that will be happening through staff and on the Hill with key members of Congress. The specifics on timing and so forth I'm not at liberty to share here, but I was encouraged overall by the sense a) that there will be changes made, likely rapidly.

Exxon Mobil (NYSE:XOM): Jeff Woodbury, IR, 1/31/17

We will continue to advocate for … free market principles. When it comes down to the important discussion that's happening in Congress in the current administration around the tax code, we believe the tax code should be globally competitive. It should be predictable, stable, providing investment certainty and not picking winners and losers. So I mean, we will continue to stay principle based in our view on those matters.

PFE: Ian Read, CEO, 1/31/17

To the extent that they can remove regulations and make it easier and faster to bring drugs to market, that will make the marketplace a lot more competitive, which will then in turn help to bring down drug prices. I believe that this is the philosophy of the administration, to ensure there's competition in the marketplace, and that would be one way of ensuring that drug prices are modified some way.

UPS: David Abney, CEO, 1/31/17

At UPS, we strongly support comprehensive corporate tax reform. Lower corporate tax rates will encourage investment, create jobs, and make the U.S. a more competitive country. We believe the case for infrastructure development is clear. A world-class infrastructure is the backbone of a modern healthy U.S. economy, and it will certainly reduce costly delays for UPS. In addition, reduction of Federal regulations will also make the U.S. economy more vibrant. UPS supports a streamlined and targeted regulatory environment, reducing uncertainty and producing better conditions for growth.

Anthem (ANTM): Joseph Swedish, CEO, 2/1/17

As we have said repeatedly, the individual market under ACA has not been working well, and changes are needed to ensure stability. We're hopeful that Congress and the administration are taking a measured approach to repairing the ACA that seeks a smooth transition to prevent health coverage disruptions for Americans whenever possible.

Stimulus & Economic Growth

Lockheed Martin (LMT), Marillyn Hewson, CEO, 1/24/17

We look forward to the upcoming submission of the new administration's budget proposal and continued congressional support for a strong defense and future recapitalization actions both in FY 2017 and beyond. We look forward to working with the new Pentagon team as we collectively look to provide our armed forces with the capabilities needed to perform their crucial missions.

Seagate (STX): Steve Luczo, CEO, 1/24/17

I think from a usage perspective, we're encouraged that they will probably be a reacceleration of data acquisition systems, which had been stalled out fairly dramatically for the last several years. And I think the change in administration is probably going to result in some growth in that segment, which has been pretty stagnant for the last few years.

Repatriation

Honeywell (HON): Dave Cote, CEO, 1/27/17

We do have a little bit of a restrictor in terms of where our cash is located. That most of the cash is overseas so we can't just take 9 billion of our overseas cash and put it in the buybacks, I mean its' just not practical. Should circumstances change around the new administration and tax quality and so forth we'd obviously take a look at it

Pfizer (NYSE:PFE): Frank D'Amelio, CFO, 1/31/17

If you look at accumulated earnings, so everything that's been accumulated already to date, the administration has a proposal of 10%, Paul Ryan has a proposal of I believe it's 8.75% on the cash, 3.5% on the noncash, and then it's payable over eight years. My short answer is the lower the better. We obviously want to have easier access to our overseas cash. And in terms of maximizing shareholder value, the lower that number is for us, the better it is for our shareholders. So my threshold, though, is low.

Alcoa (AA), William Oplinger, CFO, 1/24/17

We think it's way too early to speculate what type of implications change tax policy would have on us…. We've got earnings that are generated overseas. We've got losses largely in the U.S. due to some of the overhead costs and things like that which we don't get a tax advantage on, and you can see that sometimes in our ECR depending on how the profitability flows. So at this point I think it's too early for us to determine. Once we get an idea from the government of where they're going to land we'll have a better indication of how that will impact us.

Fiduciary Rule

Janus Capital (JNS), Dick Weil, CEO , 1/24/17

Fee pressure in the industry has been pretty constant, pretty much as long as I've been in this industry and it continues and the DOL change I think or perspective change - we'll see what President Trump does, but I think that adds more heat and pressure to the pipe.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.