How Corporations Will Spend Their Huge Piles of Overseas Cash, According to Goldman Sachs

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(Bloomberg) Get ready for more buybacks.

Companies in the S&P 500 Index will spend most of their sizable cash hoard buying back stock next year, analysts at Goldman Sachs Group Inc. write in a new note.

If so, it would be only the second time in the past 20 years that buybacks have accounted for the largest share of cash usage. Much of this, Goldman says, would be due to the enacting of plans President-elect Donald Trump proposed on the campaign trail, such as a tax holiday for overseas income and changes to the corporate tax code.

"A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004," the team, led by Chief U.S. Equity Strategist David Kostin, write. They estimate that $150 billion (or 20 percent of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30 percent higher than last year, compared to just 5 percent higher without the repatriation impact.

Other areas that will see a boost include capital expenditures, research and development, as well and mergers and acquisitions. Here's a broader look at how the analysts see firms allocating their cash in 2017.

Other Wall Street banks have started looking at the potential impacts of repatriation as well. A new note from Morgan Stanley analysts Todd Castagno and Snehaja Mogre says that this is one of the top questions they are receiving from clients, and that most are overestimating how much cash will be brought back from overseas.

"The often cited $2.5 trillion statistic [of cash for repatriation] represents accumulated foreign earnings that companies have declared permanently reinvested abroad for GAAP accounting purposes," they write. "We estimate that only 40 percent of this amount, or roughly $1 trillion, is available in the form of cash and marketable securities. Thus, the other $1.5 trillion has been reinvested to support foreign operations and exists in the form of other operating assets, such as inventory, property, equipment, intangibles and goodwill." The note did not provide more detail on how much of that available cash the analysts expect to be used for buying back stock.

A huge source of net demand for stocks throughout this bull market, buybacks are of significant importance when analysts are making their estimates for future stock valuations. One often cited comparison for a potential tax holiday is the one seen in 2004, when U.S. firms brought back $300 billion in cash and S&P 500 buybacks rose by 84 percent, according to an earlier note from Goldman.

Morgan Stanley, however, says that the massive boost in buybacks that resulted from the tax holiday of 2004 is not likely to happen again. "We believe it is highly unlikely that future policy provides optional repatriation and continuance of the current international tax system," the Morgan Stanley team concludes. "[T]he term "holiday" is somewhat misleading. We believe the most likely policy outcome is the imposition of a mandatory tax on offshore earnings required to transition to a new system for taxing foreign source income."

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