8 Companies Likely to Issue "Tax Cut" Dividend Increases

Thu., March 1st, 2018 | Matthew Paulson

President Trump and Congress passed the first major tax legislation in the last 30 years.. The legislation cut the corporate tax rate from 35% to 21%, created a new deduction for pass-through businesses and lowered tax rates for every bracket. This once-in-a-generation legislation should place hundreds of billions of dollars back in the pockets of corporations, but which companies will return these dollars to investors in the form of increased dividends?

Some companies will use the money they save in taxes or the money they repatriate overseas to reinvest in their businesses. For example, Comcast (NASDAQ:CMCSA) has announced it will be reinvesting $50 billion into its infrastructure over the next several years because of the new tax policy. Other companies may use the money to repurchase stock, but companies likely to repurchase shares over raising their dividends tend to be growth companies that are significant overvalued in the present market.

There will however be a number of companies that will boost their dividends to reward shareholders. Companies that already have strong cash flow and don't have great reinvestment opportunities to grow their businesses will be the most likely to raise their dividends.

Let's review some of the companies most likely to raise their dividends because of the tax reform act.

#1 - Apple, Inc. (NASDAQ:AAPL)

Apple (NASDAQ: AAPL) will be one of the biggest corporate winners as a result of tax reform. The iPhone maker should be able to repatriate about $215 billion in overseas profit to the United States. It will also save about $2.2 billion in taxes it would have otherwise paid. Not only will Apple have all that additional cash on h and, it also has free cash flow of more than $50 billion each year.

What's especially interesting about Apple's stock is that it is currently only yielding about 1.5%, based on its annual dividend per share of $2.52. Apple could actually afford to return its entire tax savings to investors in the form of an increased dividend, boosting it by $0.44 per share and raising their dividend yield to about 1.725%.

About Apple

Apple, Inc engages in the design, manufacture, and sale of smartphones, personal computers, tablets, wearables and accessories, and other varieties of related services. It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and Rest of Asia Pacific. The Americas segment includes North and South America. Read More

Current Price: $179.58
Consensus Rating: Buy
Ratings Breakdown: 26 Buy Ratings, 5 Hold Ratings, 2 Sell Ratings.
Consensus Price Target: $176.32 (1.8% Downside)

#2 - Cisco Systems (NASDAQ:CSCO)

Cisco Systems (NASDAQ: CSCO) has unfortunately fallen into a period of very slow growth with net income stalling during the last couple of years. However, CSCO generates about $13 billion annually in free cash flow which is impressive for any publicly traded company.

Cisco expects to save $350 million annually in taxes, which could be funneled toward its dividend to keep its shares attractive to stock investors. Cisco also has a massive amount of cash sitting overseas -- $68 billion at lat count. If Cisco were to put all of its tax savings towards its dividend, it would increase its dividend by $0.07 per share, resulting in a new $1.23 annual dividend. This would raise its dividend from 3.03% to 3.14%.

About Cisco Systems

Cisco Systems, Inc engages in the design, manufacture, and sale of Internet Protocol-based networking products and services related to the communications and information technology industry. The firm operates through the following geographical segments: the Americas, EMEA, and APJC. Its products include the following categories: Switches, Routers, Wireless, Network Management Interfaces and Modules, Optical Networking, Access Points, Outdoor and Industrial Access Points, Next-Generation Firewalls, Advanced Malware Protection, VPN Security Clients, Email, and Web Security. Read More

Current Price: $50.21
Consensus Rating: Buy
Ratings Breakdown: 12 Buy Ratings, 9 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $56.52 (12.6% Upside)

#3 - Home Depot (NYSE:HD)

Home Depot (NYSE:HD) will be another major winner in the corporate tax cut game. The company anticipates that it will save about $675 million in corporate taxes.

Home Depot is especially likely to raise their dividend because the company has had incredibly strong sales and earnings growth over the last few years. With more than $100 billion in revenue in 2017 and earnings per share of more than $7.00, the building supplies retailer is firing on all cylinders. Plus, their current dividend payment represents only 40% of free cash flow and strong dividend payers often pay up to 75% of their free cash flow in dividends.

Home Depot could funnel their entire tax savings into a dividend increase of $0.65 per share, lifting their annual dividend from $3.56 to $4.21 per share. This would increase their dividend yield from 1.88% to 2.22% overnight.

About Home Depot

The Home Depot, Inc operates as a home improvement retailer. It sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products. The company also offers installation services for flooring, water heaters, bath, garage doors, cabinets, cabinet makeovers, countertops, sheds, furnaces and central air systems, and windows. Read More

Current Price: $293.10
Consensus Rating: Buy
Ratings Breakdown: 14 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $323.25 (10.3% Upside)

#4 - Microsoft (NASDAQ:MSFT)

Microsoft (NASDAQ:MSFT) will be a major winner from the tax cut. The company is finally growing its earnings and profit with the strength of its cloud computing business. The company also has tons of cash on hand and strong cash flow, presenting no major need to invest its tax savings back into the business.

Microsoft has also made a big effort toward becoming an attractive income stock in the last several years. In 2017, the company generated more than $30 billion in free-cash flow and paid out $11.8 billion in dividends. The company's tax savings could add $0.04 per share to the company's dividend, raising it to $1.72 per share.

About Microsoft

Microsoft Corp. engages in the development and support of software, services, devices, and solutions. It operates through the following business segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The Productivity and Business Processes segment consists of Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services, LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions, Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate, and on-premises ERP and CRM applications. Read More

Current Price: $335.94
Consensus Rating: Buy
Ratings Breakdown: 31 Buy Ratings, 4 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $330.72 (1.6% Downside)

#5 - Coca-Cola (NYSE:KO)

The Coca-Cola Company (NYSE:KO) has been struggling to grow earnings during the fast several years. The world is moving away from sugary sodas and toward healthier choices. This is causing the company's revenue to fall as well as its net income. Coca-cola is trying to enter into healthy beverage categories, but its efforts haven't yet been enough.

Coca-cola is facing strong headwinds, but it has enjoyed strong cash flow for decades and has more than $40 billion in cash on hand. Because of its strong financial position, much of the company's $220 million tax savings may go to either stock repurchases or dividend increases.

If the company put its entire tax savings towards its dividend, it could raise its dividend per share from $1.48 to $1.53. This would result in 3.36% dividend yield, up currently from 3.23%.

About Coca-Cola

The Coca-Cola Co engages in the manufacturing and marketing of non-alcoholic beverages. It operates through the following segments: Europe, Middle East and Africa, Latin America, North America, Asia Pacific, Global Ventures, and Bottling Investments. The company was founded by Asa Griggs Candler on May 8, 1886 and is headquartered in Atlanta, GA.

Current Price: $60.75
Consensus Rating: Buy
Ratings Breakdown: 9 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $67.80 (11.6% Upside)

#6 - Boeing (NYSE:BA)

Boeing (NYSE:BA) is another widely-held dividend stock that is in a strong position to use its tax windfall for a dividend increase. They aren't saving a gargantuan amount of money, but will save about $93 million from the new tax legislation. This translates to a $0.16 per share dividend increase, raising its dividend to an even $7.00 per share and a dividend yield of 2.34%.

About Boeing

The Boeing Co is an aerospace company, which engages in the manufacture of commercial jetliners and defense, space, and security systems. It operates through the following segments: Commercial Airplanes (BCA), Defense, Space and Security (BDS), Global Services (BGS), and Boeing Capital (BCC). The Commercial Airplanes segment includes the development, production, and market of commercial jet aircraft and provides fleet support services, principally to the commercial airline industry worldwide. Read More

Current Price: $208.78
Consensus Rating: Buy
Ratings Breakdown: 10 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $221.60 (6.1% Upside)

#7 - Pfizer (NYSE:PFE)

Pfizer (NYSE:PFE) will save about $150 million each year in tax because of the Tax Reform act. As a pharmaceutical company, Pfizer must regularly invest its earnings into research and development to find the next big blockbuster drug. Pfizer currently puts about $8 billion into research and development annually, yet the company continues to have free cash flow between $13 and $16 billion each year.

It wouldn't be unreasonable for Pfizer to add a $0.025 dividend increase on top of its normal annual increase, which would result in a small yield boost from 3.75% to 3.77%. While this won't excite too many investors, many retirees that hold dividend stocks already hold PFE and will benefit from the increase.

About Pfizer

Pfizer Inc discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic, migraine, and women's health under the Eliquis, Nurtec ODT/Vydura, and the Premarin family brands; infectious diseases with unmet medical needs under the Prevnar family, Nimenrix, FSME/IMMUN-TicoVac, and Trumenba brands; and COVID-19 prevention and treatment, and potential future mRNA and antiviral products under the Comirnaty and Paxlovid brands. Read More

Current Price: $38.65
Consensus Rating: Hold
Ratings Breakdown: 4 Buy Ratings, 9 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $47.33 (22.5% Upside)

#8 - Qualcomm (NASDAQ:QCOM)

Qualcomm (NASDAQ:QCOM) has $30 billion in cash sitting overseas that it can now repatriate to the United States at a 14% rate (in lieu of its previous 35% rate). More than one third of the company's market capitalization is sitting overseas in the form of cash that was previously too expensive to bring back to the United States.

Qualcomm already pays a healthy dividend yield of 3.49% and has steadily been raising its dividend by 4 or 5 cents each year. It wouldn't be a stretch for the company to issue a larger dividend increase in 2018, possibly as much as 10 cents per share, to cement its position as a company that's committed to raising its dividend.

About QUALCOMM

QUALCOMM, Inc engages in the development, design, and provision of digital telecommunications products and services. It operates through the following segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on technologies for the use in voice and data communications, networking, application processing, multimedia, and global positioning system products. Read More

Current Price: $112.73
Consensus Rating: Buy
Ratings Breakdown: 17 Buy Ratings, 4 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $146.96 (30.4% Upside)