A tax holiday for cash repatriation has been getting a lot of buzz recently, and according to analysts at Citigroup, Franklin Resources, Inc. (NYSE:BEN) has the most to gain from such a deal. Rumored to be part of a broader tax reform bill, and mentioned in a recent speech given by President Obama, reduced taxes on cash repatriation is supposedly in the works. Initially, people assumed that it would be a one-time opportunity similar to what Congress added to the American Job Creation Act in 2004, but it now appears that the change could be permanent.
Bring cash back home on tax holiday
Cash repatriation is currently taxed at up to 35 percent, so corporations avoid it whenever possible and simply operate with two separate pools of cash. The new law could reduce that to as low as 5.25 percent, making the possibility of bring cash back home a lot more interesting, but that doesn’t mean it will actually happen.
“Global asset managers are the primary beneficiaries of such a measure,” explain Citi analysts William Katz, Neil Stratton, and Steven Fullerton in their report. More specifically, “the discussion of non-U.S. repatriation typically revolves the most around Franklin Resources, Inc. (NYSE:BEN).”
Benefits for multinational companies on tax holiday
Any multinational corporation would applaud the tax decrease, but the most tangible benefits will be felt by companies that can make use of the increased strategic flexibility or that want to make use of non-U.S. cash for buybacks, dividend spikes, and other capital management prospects. “US-centric managers have modest businesses overseas while online broker dealers are generally U.S.-focused,” writes Katz. Other global asset managers such as AllianceBernstein Holding LP (NYSE:AB) could in theory use the lower tax rate to their advantage, but they have already said that they “do not anticipate a liquidity need requiring a repatriation of these funds to the U.S.” and that they prefer to reinvest the funds elsewhere. Just because it becomes cheaper to bring money home, doesn’t mean that’s where the best investment opportunities are.
The only company that Katz et al. identified that would eagerly take advantage of a tax holiday, or a permanently reduced rate, was ABE which funds dividends out of US earnings. Assuming the reform goes into effect sometime in 2014, BEN could repatriate as much as $2 billion, increasing its EPS by 7-8 percent.