Political Calculations
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February 23, 2018

How are U.S. companies responding to having less of their revenues taxed by Washington D.C. after the passage and implementation of the Tax Cuts and Jobs Act of 2017?

As we've seen throughout this past week, reduced taxes have significantly increased projected corporate earnings per share by a sizable margin, where many firms have used their recently unburdened funds to repurchase their own shares in what looks set to be record numbers.

Other U.S. companies however are providing a more direct benefit to their shareholders in boosting their cash dividends, where since we've already covered the number of dividend increases and increases for the entire U.S. stock market in January 2018, the first month under the new tax law, we thought we'd go the extra mile to see how much dividends are changing.

To do that, we'll be sampling Seeking Alpha's Dividend News database to identify the U.S. companies that declared that they would either increase or decrease their dividends in January 2018, which we'll compare with a similar sample extracted from the same source in January 2017. The following chart summarizes the number of dividend increases and decreases that were declared by U.S. firms whose stocks trade on the NYSE and NASDAQ exchanges in those periods that are included in our sampling.

Sample of Declared Dividend Changes in January 2017 versus 2018

The quick text summary of the data in the chart is as follows:

  • 2017: 162 total, 151 increases, 11 decreases.
  • 2018: 177 total, 168 increases, 9 decreases.

So we see that in terms of pure numbers, 2018 is ahead of 2017. But what about the size of the dividend changes being declared?

Our next chart shows the median and mean (or average) dividend change declared by the companies sampled in January 2017 and in January 2018.

Median and Mean (Average) Change in Dividends per Share for U.S. Companies Declaring Changes in Their Dividend Payouts in January 2017 versus 2018

Focusing on the changes from 2017 to 2018, here's the text summary of the dividend data in this chart:

  • Median: January 2018's median increase of $0.020 per share across 177 companies is double the size of January 2017's median increase of $0.010 per share across 162 companies.
  • Average: January 2018's $0.031 per share is 51% larger than January 2017's average increase of $0.020 per share.

Multiply those changes by millions of shares, and suddenly, we're talking about some serious money! It's not as large as what we're projecting will go toward share buybacks in the immediate aftermath of the implementation of the new tax laws, but both are venues by which the 54% of American households that own stocks in some form can benefit from what U.S. companies are doing with the newly unburdened earnings in their financial accounts.


February 22, 2018

Following the sudden improvement in their after-tax earnings following the implementation of the Tax Cuts and Jobs Act of 2017, many publicly-traded U.S. companies are taking advantage of the permanent corporate income tax reform by buying up shares in their own companies.

That strategy is in addition to doing things like increasing compensation and paying out bonuses to employees, increasing dividend payouts to investors, reducing debt and other balance sheet repairs and also investing in new business growth opportunities, all of which have been made possible by the reduction of the corporate tax burden.

Of these strategies, things like dividend hikes and share buybacks matter to investors, where as of 2017, count approximately 54% of U.S. households among their number, either through direct ownership of shares or through indirect vehicles like mutual funds and retirement and pension plans. Where share buybacks are concerned, Investopedia has put together the following video to explain how they can affect the value of shares of stock for a company that chooses that strategy.

So what does that mean for investors in 2018? A boom in buybacks if Birinyi Associates' observations of the year to date for share buybacks through mid-February 2018 is any indication:

Since President Donald Trump signed the tax bill, companies have announced about $170.8 billion in stock buybacks, the most ever for this early in the year.

"There's a whole stock pile of cash that just came back. Take Cisco. We know they had $68 billion trapped overseas, and they're going to take $25 billion of that and buy back stock," said Art Hogan, chief market strategist at B. Riley FBR.

Birinyi Associates, which has tracked buybacks since the 1980s, said this year's level, from Jan. 1 through Feb. 15, is the most ever, topping $147.2 billion in the period of 2016, which had been the busiest at this point of the year.

Given that data point for the previous record amount of share buybacks in 2016, we've projected what the total for share buybacks in 2018 may be, assuming that the full year's total matches the same proportion that was ultimately recorded back in that earlier year for the S&P 500.

S&P 500 Buybacks (Share Repurchases), 2000-2016, 
with estimates for 2017 and 2018

The historic data in the chart above comes from Yardeni Research and Standard & Poor, where we've estimated the full year's buybacks for the S&P 500 in 2017 from the data for its first three quarters, and then used the Birinyi Associates' figure for the first month and a half of 2018 to project the total share buybacks for S&P 500 companies in 2018.

What we find is that 2018's projected total of $628 billion in buybacks will break the previous record of roughly $589 billion worth of stock repurchases that was set by U.S. corporations in 2007, which would work out to be about a 7% increase over that previous record.

Time will tell if share repurchases were the right thing for the companies that are choosing this action to have done with the benefits they received from U.S. corporate income tax reform.

Update 24 February 2018: Lance Roberts takes a different tack in considering what the new boom in share buybacks means at RealInvestmentAdvice!

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February 21, 2018

Starting back in 2012, we have taken a snapshot of the Standard & Poor's forecast for future earnings in the S&P 500 every three months, approximately at the midpoint of the current quarter. Today's snapshot of the trailing year earnings per share for the S&P 500 reveals something that we have not seen in all the time that we've visualized S&P's earnings forecasts: a dramatic increase in the amount of earnings per share that the companies of the S&P 500 are forecast to record before the end of the calendar year.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2019, Snapshot on 2 February 2018

From mid-November 2017 to early-February 2018, the forecast for the S&P 500's trailing twelve month earnings per share has risen from $133.68 to $145.67.

This change may be directly attributed to the passage of the Tax Cuts and Jobs Act of 2017, which was signed into law on 22 December 2017. The law provides for a permanent reduction in U.S. corporate income tax rates, the statutory rates for which had previously been ranked among the highest in the world.

Since the amount of corporate earnings is determined after a company's revenues have been subjected to taxes, a rather large portion of this change reflects the positive impact of the reduction in U.S. corporate income tax rates. At the same time, there also has been an organic improvement in corporate earnings in recent months, which has been driven by improving business conditions. This latter effect can be seen to some extent in the chart above as the smaller improvement in projected earnings per share recorded for the S&P 500 in the period from mid-August 2017 to mid-November 2018.

Those improvements buck the "usual" pattern that we've seen consistently over the past six years, where projected earnings per share start off strong, but then go on to progressively weaken over time as the actual future for earnings failed to live up to initially forecast expectations.

Update 24 February 2018: Lance Roberts adds his perspective on the change in expected future earnings at RealInvestmentAdvice, while Ed Yardeni considers how that might affect stock prices going forward at his site.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 16 February 2017. Last updated: 2 February 2018. Accessed 17 February 2018.

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February 20, 2018

After the wild ride it went on in the first full week of February 2018, the S&P 500 (Index: INX rallied in a subdued fashion during the second week of February 2018.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model - Snapshot on 16 February 2018

The subdued rebound for the S&P 500 was all the more remarkable because it occurred in an news environment where a resurgence in consumer inflation became more of a concern for markets, to the point where speculation began to rise that the Fed might hike short term interest rates in the U.S. four times in 2018.

Checking in with the CME Group's Fedwatch tool, we find that investors are still only betting on three rate hikes occurring during 2018, near the end of the current quarter of 2018-Q1, and the more distant future quarters of 2018-Q2 and 2018-Q4, where the probabilities reported by the tool indicate a greater-than-50% chance that the Federal Funds Rate will be increased by a quarter point (or more) at these specific points of time in the future.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 16 February 2018)
FOMC Meeting Date Current
125-150 bps 150-175 bps 175-200 bps 200-225 bps 225-250 bps 250-275 bps 275-300 bps
12-Mar-2018 (2018-Q1) 16.9% 83.1% 0.0% 0.0% 0.0% 0.0% 0.0%
13-Jun-2018 (2018-Q2) 3.9% 31.3% 60.3% 4.5% 0.0% 0.0% 0.0%
26-Sep-2018 (2018-Q3) 1.7% 15.3% 41.9% 34.7% 6.0% 0.3% 0.0%
19-Dec-2018 (2018-Q4) 0.9% 9.1% 29.2% 36.6% 19.4% 4.4% 0.4%

The headline of the week was the drastic reduction in the kind of volatility that characterized the previous two weeks for the S&P 500. So much so that if we were to redraw our "connect-the-dots" manual forecasts of the potential trajectory of stock prices in our alternative trajectories chart above, we would choose a projected point for the alternative trajectories of 2018-Q1 and 2018-Q2 in the second week of March 2018, which would fall outside of the short term volatility echo in our model's projections, where they would extend slightly longer and instead of being flat-to-slowly rising, they would indicate slowing declining-to-flat.

Still, all the other assumptions behind our red-zone forecast appear to be holding at this time, so we're going to let the original forecast ride. We're also noticing something potentially interesting in the level of stock prices with respect to the alternate future trajectories our dividend futures-based model projects, where they would appear to be consistent with the levels that our model had projected earlier this year, before the year's volatility events really took off, adding considerable noise to its projections. We'll take a closer look at what that might mean for our red-zone forecasting approach in March, after all the data for the S&P 500 through the period of the short term volatility echo has come in.

While Week 2 of February 2018 was relatively subdued compared to the previous two weeks, there was no absence of potential market moving news during it. Here's the roundup of headlines and stories that caught our attention during the week that was.

Monday, 12 February 2018
Tuesday, 13 February 2018
Wednesday, 14 February 2018
Thursday, 15 February 2018
Friday, 16 February 2018

Meanwhile, The Big Picture's Barry Ritholtz outlined the positives and negatives for the U.S. economy and markets for the second week of February 2018.

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February 16, 2018

Did you ever want to get into quantum physics, but didn't know where to start?

A good place to begin understanding a complex, complicated thing like quantum mechanics is at the beginning, where believe it or not, it all started with, dare we say, a light bulb moment! Check out the following video from MinutePhysics on the origin of quantum mechanics, which is really all about how physics works on the tiniest scales possible.

If you're ready to move on to the next level, you might enjoy Dominic Walliman's explanation of Quantum Physics for 7 Year Olds. After that, before you get cocky, remember that "nobody understands quantum mechanics!"


About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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