Dominant carriers Verizon and AT&T stand to benefit most from tax reform plans under consideration by the US Congress, though the measure could spur increased investment across the industry, Wells Fargo Securities analysts predicted.
Separate tax reform bills were recently passed by both houses of Congress. Negotiations are currently underway to find a middle ground both chambers can agree on, but reports suggest the final measure will lower the current 35 per cent corporate tax rate to around 21 per cent and include a provision allowing companies to deduct capital expenses for the next five years.
In a research note, senior analyst Jennifer Fritzsche said the company believes Verizon and AT&T’s cash tax obligations (the sum companies must pay to meet their tax obligations to the government), capital intensity and moderate leverage will enable them to “fully deduct interest expense” under the reformed tax code. This will boost earnings per share and free cash flow, she explained.
For example, by using the deduction provision on capex, AT&T and Verizon’s free cash flow could benefit to the tune of around $1.6 billion and $1.2 billion respectively, Fritzsche noted. Through 2018 and 2019, AT&T may see growth in earnings per share of 16 per cent and Verizon 20 per cent, she added.
While AT&T and Verizon were tipped to be in the best position to capitalise on the reform provisions, Fritzsche said capex deductions could spur increased investment across the industry. In addition to 5G rollouts, Fritzsche said Wells Fargo Securities believes “many investments could be accelerated to take advantage of capex deductibility,” including AT&T’s FirstNet build, T-Mobile’s 600MHz project and Sprint’s broad network enhancements.
AT&T stated previously it will invest an additional $1 billion if reforms are passed: CFO John Stephens also hinted the tax overhaul could be a boon for the operator’s enterprise business by generating more demand for its services.
But in a separate research note last week, MoffettNathanson analysts concluded Verizon and T-Mobile would be the top beneficiaries of tax reform. AT&T stands to gain less because “low taxes in the forecast period, lessen the impact of incremental tax cuts,” they noted.
MoffetNathanson said tax reform is “irrelevant” for Sprint.