Here come those tax cuts! If you are an American corporation, especially a large publicly traded one, there is going to be a windfall. Now, some of these companies will plow the savings back into their businesses.
Others will repurchase stock, which I don’t generally like considering how overvalued many of these companies are. Others may use the money to pay down debt.
Still, others will have plenty of cash to reward shareholders by increasing dividends. With taxes being cut from 35% to 21%, that represents a 40% savings; companies paying tons in taxes may love the idea of boosting their dividend to attract more income investors.
Here are seven companies I see as raising their dividends.
‘Tax Cut’ Dividend Stocks: Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) stands to save about $1.35 billion annually. As a Big Pharma and diversified consumer product company, it must always be stuffing money into its R&D division.
R&D routinely costs about $9 billion on an annual basis, yet that money is pulled from its rather strong and consistent free cash flow of $15 billion annually.
Figure as much as a 40 cents per share dividend increase on top of its already annual payment of $3.36, lifting the yield from 2.37% to 2.6%. Since JNJ is held by many income investors, they’ll take all the money they can get.
‘Tax Cut’ Dividend Stocks: Lowe’s (LOW)
Lowe’s Companies, Inc. (NYSE:LOW) is a big winner in the corporate tax cut announcement. LOW will save close to $525 million annually. The wonder of Lowe’s is that the company continues to do very well as the economy improves, and should keep that pace up.
Its current dividend is only $1.12 billion, and that’s just 25% of free cash flow. Lowe’s will almost certainly use much of its savings to boost that dividend by as much as 60 cents per share, lifting the dividend from $1.62 to $2.24 per share.
That would push the yield from 1.73% to 2.37%.
‘Tax Cut’ Dividend Stocks: Pepsi (PEP)
Pepsico Inc. (NYSE:PEP) has been floundering a bit, as the company probably never expected consumers to push soda aside in favor of “healthier” drinks. Nevertheless, that has occurred.
Revenues are down, but not horribly. Fortunately, net income and cash flow still are doing well. Still, PEP stock has $18 billion of cash on hand. It generates $7.4 billion in free cash flow and pays $4.2 billion in dividends.
$840 million in tax cuts translates to as much as 60 cents per share in boosted dividends, lifting the present $3.22 payout to $3.82 per share, and pushing the 2.72% yield to 3.25%.
‘Tax Cut’ Dividend Stocks: Procter & Gamble (PG)
The Procter & Gamble Company (NYSE:PG), like JNJ, has a great opportunity here to lift its dividend. Unlike JNJ, however, it doesn’t have to pour tons of money into pharma R&D. P&G has been dealing with modest revenue declines by cutting expenses brutally.
Still, it remains a very profitable company paying over $3 billion in annual taxes With a savings of $1.2 billion, that translates to about 47 cents per share that it can afford to just plow into the dividend.
It pays $7.2 billion in dividends and the additional boost will push the dividend to $3.23 per share, or about 3.55%.
‘Tax Cut’ Dividend Stocks: McDonald’s (MCD)
McDonald’s Corporation (NYSE:MCD) has been enjoying a terrific turnaround. The stock roared from the high-80’s to $173, and it seems its new brand is winning over consumers.
MCD is also a very consistent company that often generates about $4 billion or so in free cash flow each year. About $3 billion is paid in dividends. It will save $880 million, and that amounts to a whopping $1.10 per share.
I don’t know if McDonald’s will throw it all at the dividend, but if it does, it would mean a boost of almost 25%, lifting the $4.04 payment to $5.14, and the yield from 2.34% to 3%.
‘Tax Cut’ Dividend Stocks: 3M (MMM)
3M Company (NYSE:MMM) is one of the last truly great conglomerates that has outlasted some of the other big names. It truly has its hands in everything.
While revenues and net income have effectively stalled, its $4.8 billion of free cash flow is about as consistent as the sun rising.
Only $2.67 billion is paid out as dividends, so the $800 million in tax savings it has could very well end up resulting in a dividend increase of $1.33 per share. Even though that would take the total payout to $6.03 per share, the yield would still only be 2.5%.
‘Tax Cut’ Dividend Stocks: Visa (V)
Visa Inc. (NYSE:V) is a pretty incredible business that has very little capex, and remains extremely profitable. It owns almost a quarter of the entire credit card market.
Its cash flow is far more erratic, yet whether it is $6.1 billion in FY14 or $8.5 billion in FY16, it only pays $1.57 billion in dividends.
It would save a smashing $2 billion in taxes which could result in a $1.10 per share increase, to a total payout of $1.88, more than doubling the current yield to 1.57%.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].