Investors parse impacts on multinationals from House tax bill

NEW YORK/SAN FRANCISCO (Reuters) - A U.S. Republican tax bill unveiled on Thursday offers big multinational companies more benefits than minuses, and could free up extra cash for investments, dividends or improving balance sheets.

The measure, which faces a long road ahead with final approval by Congress uncertain, would slash the corporate tax rate, a change U.S. companies have been seeking for years.

But it might hamper some highly leveraged companies’ ability to deduct debt interest. It could also strip some tax breaks from sectors such as energy and pharmaceuticals.

“This bill would give most companies a lot to cheer about, but we’re getting a muted reaction in the market because there will be a lot of pushback” from companies that could lose some of their tax breaks, said Pete Santoro, a portfolio manager of the $3.8 billion Columbia Dividend Opportunity INUTX.O fund.

The 429-page tax bill would be the largest overhaul of the U.S. tax system since the 1980s. It would cut the corporate rate to 20 percent from 35 percent, reduce tax rates on individuals and end certain popular tax breaks, including deductions for state and local taxes and half the interest deduction on new mortgages.

It would also create a new 10 percent tax on U.S. companies’ foreign subsidiaries and impose a 20 percent tax on payments that foreign businesses operating in the United States make from their American operations.

President Donald Trump told House Republicans he hoped to sign the bill into law by Nov. 23. Such a move would stand as the Trump administration’s first major legislative victory.

The overall market reaction to the bill was mixed, with the Dow Jones Industrial Average rising 0.3 percent while the broader S&P 500 index was flat.

Despite the uncertainty, investors and analysts looked for those companies that would see the largest impact if the bill was approved. Chief among them: companies such as General Electric Co GE.N, which has more than $10 billion in foreign assets such as property and equipment that would be subject to a one-time tax of 5 percent, totaling $2.1 billion, according to Morgan Stanley.

Shares of General Electric fell nearly 1 percent on Thursday, continuing a nearly 20 percent decline over the last month spurred by analyst downgrades and fears that the company may cut its dividend. GE did not immediately respond to requests for comment.

Renewable energy companies and pharmaceutical companies that receive tax credits for clinical testing expenses for certain drugs would also face increased costs if the Republican bill passes, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. Yet the removal of those tax breaks makes it less likely the bill will pass, he added.

“What makes this tax reform rather than just tax cuts is that they’re taking on a lot of provisions that target specific industries. That’s why, while taxes are hard, tax reform is harder,” he said.

Among potential winners are technology companies such as Apple Inc AAPL.O, Microsoft Corp MSFT.O and Cisco Systems CSCO.O, which hold more than 10 percent of their market values in cash abroad, said Rob Martin, an economist at UBS.

A 12 percent tax bill - versus 35 percent now - on repatriated profits is “higher than some companies hoped for but low enough that I think they’ll be happy,” he said.

Investors expect the specifics of the bill to change as corporations lobby to keep or insert favorable tax breaks.

“In its current form there is a zero percent chance that this passes,” said Linda Bakhshian, a co-portfolio manager of the $1.2 billion Federated Equity Income fund LEIBX.O.

Reporting by David Randall and Noel Randwich; Additional reporting by Lewis Krauskopf; Editing by Dan Grebler