Moody’s says most companies polled in a survey said new tax laws will improve cash, help pay down debt
Companies see the new US tax law as a positive that will improve cash flow, give them the ability to pay down debt and, to a lesser extent, buy back stock, according to Moody’s survey. Overall, 65% of respondents said they would be “better off” under the new tax regime. Most respondents also indicated that they will not change financial policies significantly, which means their ratings likely will not be affected, Moody’s said in a sector comment to clients.
“The share of companies indicating cash flow would improve closely tracked the percentage of respondents saying they would be better off, suggesting views on cash flow is a primary driver of the tax law assessment,” Moody’s wrote in its report. “Overall, 65% of our survey respondents said they would be better off and a similar 64% indicated their cash flow would improve.” Moody’s said investment-grade companies were generally more positive than spec-grade companies, although spec-grade companies were still positive overall. Of investment-grade respondents, 75% indicated they would be better off vs. 63% of spec-grade respondents.
In terms of where the money will go, Moody’s said respondents “targeted various uses for the additional cash flow,” including repaying debt (45%). “Capital spending, research & development and acquisitions were also prominent planned uses of cash. The rating agency said only 7% of companies said they planned to increase staffing levels, but 13% said they planned to increase “non-executive” compensation. Moody’s said 14% plan on increasing share repurchases while only 7% of companies expect to increase recurring dividends.
The findings mirror surveys done by NeuGroup of its peer groups of larger companies. According to an early 2018 survey of 31 companies in Treasurers’ Group of Mega-Caps and the Treasurers’ Group of Thirty Large-Cap Edition, 56% of peer group members said they plan on paying down debt. This compares with 52% of companies in the survey that plan to use their repatriated funds to repurchase stock and for M&A activity. Most plan on reducing commercial paper balances, while 44% plan to target shorter maturities and 25% plan to reduce debt across the curve.
For financial policies, Moody’s said most companies indicated that “any financial policy changes were much more likely to align with the current (61%) or a higher (33%) credit rating than to reduce (4%) their credit rating.”
Moody’s said companies will shift their cash holdings globally, however. The rating agency said investment-grade companies “are more likely to shift their cash holdings, with 35% indicating they would increase domestic cash and 50% saying they would reduce international cash holdings.” Meanwhile, 24% of spec-grade companies said they would increase net operating loss (NOL) utilization; this was more than the 15% of investment-grade companies with similar plans. Moody’s said these moves were “potentially because the loss of interest deductibility is a bigger issue for more highly leveraged companies.”