Altria To Be One Of The Biggest Gainers If The Corporate Tax Rate Falls

by Trefis Team
+10.24%
Upside
65.07
Market
71.73
Trefis
MO
Altria Group, Inc.
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President Trump has big plans to overhaul the tax system in the United States, which is scheduled to be disclosed on Wednesday, October 4th. While Trump originally wanted to cut the corporate tax rate down to 15%, a 20% rate is expected, among other reforms. This would be a substantial fall from the 35% statutory rate at present. Although the Republican leaders, as well as the White House, would prefer to see the new measures completed by the end of the financial year, political analysts and the Wall Street are expecting the bill to pass by early 2018. With a failure to repeal and replace the Affordable Care Act, and the absence of any major legislative victories, there will be an increased pressure on the Republican government to pass through this tax plan. One company that can benefit if this bill is passed is Altria (NYSE:MO), as the company operates entirely in the United States, and is hence, subject to the exorbitantly high corporate tax rate in the country.

Altria Forced To Pay High Tax Rates Currently

Since splitting with Philip Morris, Altria operates solely in the United States. This factor does have some positives. The increased global regulations and the rising strength of the dollar, which have together hit the tobacco companies with international operations, have had no impact on Altria’s performance. However, on the other hand, it also means that since all of its revenues are earned in the US, they are taxed at US rates. The company’s effective tax rate has hovered around 35% for the past few years, implying that more than one-third of its earnings are going towards its tax payments.

While the statutory rates in the US are quite high, that is typically not the rate most companies end up paying. Deductions and credits can help to reduce the tax liability, and as a result, such companies end up doling out taxes at a lower rate than the statutory rate. As a result, the average tax rate paid by corporates in the US is actually 18.6%, which is, in fact, lower than the rate the Trump government is proposing. According to CSIMarket, on a trailing 12 months basis, the effective tax rate is 24.17%. Hence, the tax rate paid by Altria is much higher than that paid on average by other companies in the United States.

During 2016, the company’s earnings before income taxes were $21.9 billion, and it had to pay taxes of $7.6 billion on it, implying a tax rate of 34.8%. If the tax rate was instead 20%, its tax liability would have been close to $4.4 billion, and its earnings after taxes would rise to $17.5 billion, instead of $14.3 billion. This would mean its earnings would rise by over 22%, and consequently its earnings per share. Thus, it can be seen that a fall in the tax rate would have an immensely positive impact on Altria, and as a result, would likely give a boost to its stock price.

See Our Complete Analysis For Altria

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Altria.
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