Tax Reform: Playing the Long Game

Analyzing the Relative Winners and Losers

By Kevin Toney & Mike Rode - November 2018

Key Takeaways

Tax Reform Lifts Some Sectors More Than Others

  • While we don’t believe there are many losers because of tax reform, we do think there are relative winners and relative losers. Relative losers tend to be industries or companies that typically operate in a highly fragmented, price-competitive environment where tax benefits are expected to be rapidly competed away.
  • Some may be relative losers because their effective tax rates were already near or below the new statutory rate and therefore saw little to no benefit. Some companies will be negatively affected by the elimination of tax deductions. Relative winners tend to compete in industries that have high barriers to entry, operate in an oligopoly or duopoly, and are U.S.-focused.

Capital Allocation Is Crucial

  • While near-term effects of tax reform have been largely factored into market prices, as value investors, it’s critical to assess how capital allocation will affect long-term franchise sustainability, competitive positioning, returns on capital, and the ability to generate free cash flow.
  • Skilled capital allocation of higher profits and the returns on those investments will determine the ultimate, relative winners of tax reform. According to our research, higher-quality companies with leading market share, high returns on capital, low leverage, and strong management will likely deliver solid returns with less volatility over a full market cycle.
Mike Rode
Mike Rode

Tax Reform: Playing the Long Game

Analyzing the Relative Winners and Losers

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    Tax Reform: Playing the Long Game

    Analyzing the Relative Winners and Losers

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      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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