Nothing comes for free. And this holds true for the most recent tax policy change that lowers corporate tax to 21% from 35%. Consequently, American Express Co. AXP will have to pay a price before reaping benefits in the long term.
In a recent regulatory filing, American Express disclosed that the tax act is likely to impose nearly $2.4 billion charges in fourth-quarter 2017. The non-recurring expenses are mainly due to write-down in deferred tax assets (DTAs) (driven by reduction in corporate tax rate to 21%) and one-time tax on the company’s unrepatriated overseas earnings.
This one-time charge will lead American Express to incur loss in the fourth quarter. Consequently, the company now expects 2017 earnings to fall short of its guided range of $5.80-$5.90 per share.
American Express’ regulatory capital and capital ratios are expected to take a beating by adjustment in its U.S. deferred tax assets and liabilities resulting from the tax reform. However, these will remain above the minimum regulatory capital requirements.
In retrospect, we will not be surprised to see the company cutting back on its share buyback plans to address the capital shortfall.
Some other big names in the financial sector like Bank of America BAC, Citigroup C and Capital One Financial COF have also noted that the tax reform will likely result in significant one-time charges.
BofA expects to record a $3-billion charge in the fourth quarter while Citigroup anticipates to take a whopping $20-billion blow on earnings due to write-down on DTAs. In the same vein, Capital One Financial would be affected by nearly $1.9 billion on similar charges.
Despite inducing a short-term pain, the tax act is projected to lend some relief to corporates in the long term.
Similarly for American Express, this adverse impact is a one-time affair and the company stands to gain in the long run from higher earnings and an increase in capital deployment plans. It might also make accelerated investments in technological upgrade and other growth initiatives.
Shares of American Express have nudged up 0.8% since the tax reform bill was signed into law on Dec 22, underperforming the industry’s growth of 1.4%.
American Express carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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