warren buffett

Buffett: huge tax cut isn't baked into market

Warren Buffett believes that the corporate tax reform is very bullish for the US stock market, and more importantly, isn't fully priced in to stock prices.

"The tax act is a huge factor in valuation," he said on CNBC's "Squawk Box" on Wednesday. "You had this major change in the silent stock holder in American business who has been content with 35 percent... and now instead of getting 35 percent interest in the earnings they get a 21 percent and that makes the remaining stock more valuable."

The tax reform bill lowers the corporate tax rate to 21 percent from 35 percent. "I think 21 percent was not baked in. That's a huge reduction," he added.

Runnymede echos Buffett's sentiment. On Monday, I appeared on Reuters TV with Fred Katayama and I said, "With tax reform approved, I think a lot of those numbers (tax cuts) aren't baked into the market so the market is catching up to those expectations."

The example that I gave was Dollar Tree whose effective tax rate was close to 35 percent. With the tax cut, it gives them an additional $150 million in profit which can be used to increase pay, invest in expansion and return money to shareholders via buybacks and dividends.

Walmart and Waste Management giving raises and bonuses to employees

Companies are taking advantage of tax reform to make big headlines over the last 24 hours. Yesterday Waste Management announced that they would pay a $2000 to their 34,000 employees due to tax reform. By my calculations, over the last 12 months, Waste Management would save $290 million and they are giving their employees a $68 million payout, or a quarter of the tax savings. It remains to be seen what they intend to do with the other $222 million of potential additional cash.

This morning, Walmart announced that they will increase the minimum wage for its employees from $10 to $11 and also give employees a bonus of up to $1,000 based on service time. The increase in wages will cost the company an additional $300 million this year and the one time bonus will amount to $400 million. By my estimate, over the trailing 12 months, Walmart would save at least $1.5 billion in taxes so it is nice to see that they are giving close to 50 percent of the tax cut back to its employees.

It is clear that the corporate tax cut will provide stimulus to the economy. In this case, employees will have additional money to spend thanks to wage increases and/or bonuses. This money can cycle through the economy many times. Furthermore, the rest of the tax savings will likely to returned to shareholders via huge buyback programs and increased dividends. This should be very bullish for US stocks in 2018.

"Warren Buffett - Caricature" by DonkeyHotey is licensed under CC BY 2.0


Share This Story, Choose Your Platform!

About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Search Website

Annuity Review Database

Follow Our Podcast

Google Podcasts
Apple Podcasts

Recent Posts