American Airlines and Southwest Hop on the Tax-Cut Employee Bonus Bandwagon
The major cut to the corporate tax rate that Republicans in Washington just enacted will be a windfall for U.S. corporations, a few of which are making a point of passing some of their good fortune on to their employees.
But as host Mac Greer and guests Matt Argersinger and Jason Moser of Million Dollar Portfolio point out in this segment of the MarketFoolery podcast, one-time bonuses like those issued by leading passenger carriers American Airlines (NASDAQ: AAL) and Southwest Airlines (NYSE: LUV) are more PR moves than anything else. So where will the lion's share of these corporate tax gifts get spent? And looking specifically at these two companies and their industry, what is the outlook for airlines? The Fools discuss.
A full transcript follows the video.
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This video was recorded on Jan. 3, 2018.
Mac Greer: Let's go ahead and start with more news about the new tax law, and companies paying bonuses. Matt, this time, news that's American Airlines and Southwest both announcing plans to give employees a $1,000 bonus due to the new tax law. That came out on Tuesday, that announcement. Now, Matt, there's been a lot of speculation about how companies might use their tax savings. We're starting to get some evidence, based on these bonuses. Southwest also saying they're going to exercise an option to buy 40 jets from Boeing. What do you make of it all?
Matt Argersinger: This comes on the heels of news from Wells Fargo doing something similar. A few other companies -- American Express, I think, was also paying one-time bonuses to employees. These are nice, and no one is going to complain about getting an extra thousand dollars in a paycheck. But something like this reeks of public-relations opportunism. "Hey, we got a big corporate tax break, so let's do something nice in the short term for employees." It certainly helps the image. It helps the CEO. It's a nice story. But this kind of stuff in the long term isn't going to mean a lot for workers or how corporations employ capital.
I think why this could be a little different, and why we might see more hiring and more investment going forward is, there's been a permanent change to the corporate tax rate. It's down to 21% from 35%. So if I'm the CFO of a company, any company, especially a growing company in the U.S., I'm not spending a lot of time now looking for tax savings abroad or fishing for loopholes in the tax code where I can make more on the bottom line, because now essentially, I live in a tax haven in the U.S. So I feel like we're going to see a lot more evidence as the year goes on about more investment.
I know Jason is going to make a point -- not all of it is going to be really effectively hiring or raising wages or things like that that we'd like to see. But I think it's going to have a real positive impact on corporations and employees going forward.
Greer: That's interesting, because a lot of the speculation, Jason, leading up to the tax bill, there were surveys, and a lot of people speculating that these companies are primarily going to take those tax savings and use them for share buybacks and maybe hike dividends. And Matt, you seem to be saying, maybe not so fast.
Argersinger: I think that's going to be good, and I think it's going to be great for shareholders and investors like us. But I do think, because there's been a permanent change in the tax code versus previous times when we've had temporary special one-year tax things you can do, it is going to have an impact. It might not be as great, and I think a lot of those new dollars are going to go to buybacks and dividends. But I think there's going to be some meaningful reinvestment in business going forward as well.
Jason Moser: I don't disagree. I feel like we're going to see a little bit of a lot of it. You have to go back and look at history to give us some ideas of what might be done with this money. Go back to 2004, where there was a tax holiday. It was part of the American Jobs Creation Act. Facts that went back and put some numbers together, and overwhelmingly that tax holiday money was used for share buybacks and dividends, whether they be special dividends or increases into the regular dividend. So that's great. As an investor, generally speaking, you have to feel pretty good about that.
Now, the flip side of that is, we also see the numbers bear out over time that companies usually do a pretty crappy job at share buybacks. They buy back when the stock is at all-time highs, and then, when the bottom falls out, they really tighten the purse strings. And really, you kind of want to see them take advantage of those buybacks when the stock is cratering. And that can be a little bit of a difficult thing to do sometimes, because perhaps these companies don't necessarily have these vast financial resources. I think we're going to see a lot of these vast financial resources open up here with this tax holiday, or this new tax structure, coming in.
To me, I look at these $1,000 bumps that all of these companies are offering, and yeah, on the surface it's great. It does offer some good publicity. It's a wonderful headline for these companies. A little bit of a tip of the cap to the lower tax rate makes everybody feel good, and it certainly gets folks on both sides of the argument arguing a little bit more. It's just a drop in the bucket, though. It's a drop in the bucket, it's a one time thing, and it really doesn't tell us what they're going to do beyond that. We'd love to see them spend more money. The only thing that's going to really tell us that is hindsight, though -- looking back and actually seeing if actions do, in fact, speak louder than words.
But I think Matt made a good point there. This gives a lot of CFOs -- their typical mandate is to figure out how to minimize that tax rate. They don't have to focus as much, at least. I think they're going to continue to try to figure out how to get that tax rate even lower, because generally speaking, people don't want to pay taxes. I get that. But by the same token, this is going to give them a little more transparency, a little bit more of an ability to plan for the future. And I think that could ultimately be a good thing.
Argersinger: Part of the dilemma here is, U.S. corporations in particular didn't need this. If you look at the balance sheets of most U.S. corporations, great shape. Lots of cash; very low-cost debt. Whether or not you have a 35% tax rate or a 21% tax rate, it was fine. They were making plenty of money. So I think one thing you will see, in addition to buybacks and dividends for sure, and maybe a little hiring, a little bit of capital investment, is I think you're going to see more acquisitions now.
Two reasons for that. We're looking for returns now. Corporations are flush, lower tax rate -- where am I going to get the returns? If I can't get it from reinvesting in the business or R&D, new capital investment, or even hiring, I'm going to look where I can make acquisitions to add to the business. And two, I don't want to delve into politics at all here, but from reading conference calls lately, interviews with CEOs, there's at least a sense that the climate is more business-friendly. This administration, for all it's worth, is a little more business-friendly. So the idea of doing big corporate deals, unless there's some kind of angle there that our favorite president doesn't like, probably going to get the green light. And that's in regard to the later stages of a bull market as well. You're going to see some big acquisitions. 2018 might even be a record year for it.
Greer: Let's pivot to the two companies here that we're talking about, Southwest and American Airlines. Matt, I know in the past year, you've had some bullish things to say about airlines. What do you think about the airlines going forward?
Argersinger: I think it's a great time to be interested in buying or investing in airlines. For reasons I've said before, the consolidation we've seen, the time they've taken to improve their balance sheets, the pricing power that they have now, the hub-and-spoke routes that have been made more efficient for airports and things like that, it favors the big four airlines in the U.S. So when I see things like Southwest announcing that they're executing a contract by, I forget what it was, how many more planes from Boeing. Delta made a big deal with Airbus recently to buy new planes. These are big investments they're making, because they see the opportunities, they see the pricing power, they see a future where oil prices aren't going to crush them anymore. I'm a big fan of investing in airlines right now.
Greer: Well, this may be totally unfair, but I have some breaking news that may weigh on your investing thesis. This is courtesy of cnbc.com. " Alaska Airlines is calling in an exterminator after the company says a rat boarded one of its planes at Oakland International Airport in California, and forced it to cancel the flight."
Argersinger: Man. You know, I'm reassessing my thesis right now, Mac.
Greer: Now, what strikes you as odd about that sentence? Because I've been obsessed with this story. Let me read it again. "Alaska Airlines is calling in an exterminator after the company says a rat boarded one of its planes." Can a rat board a plane? Doesn't boarding suggest permission and intent?
Argersinger: Yeah, it does seem strange to me. Did he go through customs? Did he go through the luggage?
Greer: He jumped on the plane from the jetway. But you can't board a plane, can you, unless you intend to? And someone gives you permission?
Moser: Well, I don't know that permission is necessary.
Greer: Can a rat board a plane? Marketfoolery@fool.com.
Argersinger: Let us know.
Greer: That's the question. I don't know. I think that's the wrong word. It's not Stuart Little here. He's not getting his boarding pass.
Moser: A rat was found. Boarding the plane. That really implies that someone saw him. And then, you're letting a rat on the plane?
Greer: No!
Argersinger: Here's the question --
Moser: Snuck on the plane. Hopped on a plane.
Greer: Stormed the plane.
Moser: There you go.
Argersinger: -- if I'm a passenger, is the plane now not moving because there's a rat there? And poor passengers have to wait --
Greer: They canceled the flight. They pulled everyone off.
Argersinger: Oh, no way.
Greer: Yeah, no, I love this. "Alaska Airlines says it will resume using the plane when a professional exterminator certifies that it is rodent-free."
Argersinger: I guarantee you, if you ask 95% of the passengers on that plane, and they said, "Hey, we can either fly with a rat on board or we can cancel."
Greer: No way.
Argersinger: You wouldn't fly with a rat on board?
Greer: No, because he could chew through the cables. No way. I mean, if it's like Stuart Little, if he truly boarded the plane and he has a little carry-on and he's well-behaved, that's fine. But most rats aren't that.
Argersinger: So you're flying home after the holidays, or for the holidays --
Greer: No. You have to think what the rat could do. He could get in the cockpit and chew through the autopilot or something. I don't know.
Argersinger: I guess that's true.
Greer: Not that you could chew through the autopilot. But I'm just thinking, it just takes one cable.
Argersinger: That's true.
Moser: It's better than a scorpion. A few months back, there were reports of a scorpion that was found on the plane, and that, to me, that makes a rat a little more tolerable.
Greer: I'd take a scorpion before the rat.
Argersinger: There would have to be a dozen snakes on the plane before I would be like, "Cancel my flight." I want to go home.
Greer: Let's not lose focus here. The issue here is, I don't think a rat can, quote, "board" a plane. I think "board" suggests permission and intent.
Argersinger: Yeah.
Moser: I agree.
Greer: This is important.
Moser: They probably fired the employee that actually let the rat board. That's what you're telling me.
Greer: Exactly. Then again, if the rat had the wherewithal to buy a ticket and present a boarding pass in a timely fashion...
Moser: That's a smart rat.
Greer: There you go. So, moving on. [laughs] That's so unfair. That doesn't change your thesis on the airlines?
Argersinger: No, I'm still bullish on airlines.
Greer: OK.
Jason Moser has no position in any of the stocks mentioned. Mac Greer has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Delta Air Lines and has the following options: long January 2019 $65 calls on American Express, short April 2018 $97.50 calls on American Express, and short January 2018 $45 puts on Delta Air Lines. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.
