The theory is that by lowering taxes on corporations, it will make them more competitive internationally. It will also, in theory, prevent companies from relocating to other countries with lower tax rates and taking away US jobs when they relocate. However, as the above chart shows, Microsoft already has a lower effective tax rate than many of its peers. Lower corporate tax rates could help Microsoft on the margin, but competitively less so than its peers. Arguably, Trump could spur the overall economy by lowering tax rates across all market sectors which would eventually trickle down to Microsoft, but in the immediate term a lower corporate tax policy is likely to help Microsoft less than other companies.
3. Raising Interest Rates:
The Fed sets interest rates, not the President, but Trump’s aggressive growth agenda could speed up the economy resulting in the Fed acting sooner to raise rates faster and this could actually help Microsoft given its large cash balance that currently earns very low interest (i.e. higher interest rates mean Microsoft could earn a higher rate of return on its cash). And granted, much of the $137 billion in cash on Microsoft’s balance sheet is overseas, but in theory the US can lead interest rates around the world higher if it’s successfully able to accelerate growth.
4. Repatriating Non-US Cash:
As the following chart shows, Microsoft has a very large amount of foreign cash. And given the currently high tax rates to repatriate this cash, companies aren’t doing it.
If the Trump Administration were to orchestrate a tax deal whereby companies could pay less tax then they’d likely be willing to bring that cash back to the US. This would be a “win-win” in the sense that the lower tax rate would allow companies to bring the cash back to the US and create more US growth and US profits, while still allowing the government to collect some revenue from the lower taxation rate on the repatriation. This is a potential Trump policy that actually makes sense and could benefit Microsoft.
International Trade:
Donald Trump has expressed a combative attitude towards international trading partners. For example, he is not happy with China, and according to his website, he wants to:
1. “…label China a currency manipulator.”
2. “…bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO.”
3. “Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities, including its theft of American trade secrets – including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.”
However, if Trump starts a trade war with China, China has the ability (and a track record) to inflict pain on US companies. For example, during the early 2000s, China openly allowed pirated copies of Microsoft Windows to be sold in most big cities for only around $1 (clearly this was not good for Microsoft). And it would be easy for China to allow similar cases going forward if Trump takes any aggressive actions. As another example, China is already flooding US markets with too much steel and aluminum which is keeping prices artificially low and hurting US producers. As yet another example, China has a reputation for manipulating its currency thereby making its exports very inexpensive.
If Trumps starts a trade war with China (he did threaten a 45% tariff during his campaign), or any other country for that matter, it could end badly for all US companies, especially those with significant non-US business, such as Microsoft (e.g. Microsoft has 51,000 international employees, and international operations provide a significant portion of Microsoft’s total revenue).
Conclusion:
Things could end badly for a lot of tech companies, especially Microsoft Corporation (NASDAQ:MSFT), if the new administration follows through on some of its aggressive policy ideas, particularly with regards to international trade. However, despite the policy-related risks, we’ve still ranked Microsoft #7 on our list of Top 7 Tech Stocks Worth Considering because we suspect cooler minds will prevail, thereby making Microsoft attractive because of its strong evolving business, above average dividend yield, and continued upside potential.
Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.
