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The Trump tax cuts will benefit investors, not workers, this CEO says

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ADP CEO Carlos Rodriquez on CNBC last year, with an image of investor Bill Ackman in the background. Source: CNBC
ADP CEO Carlos Rodriquez on CNBC last year, with an image of investor Bill Ackman in the background. Source: CNBC

Dozens of companies have given employees one-time bonuses on account of the tax cuts President Trump signed into law last year.

But not Automatic Data Processing (ADP), the payroll and human resources company. In fact, ADP’s CEO recently told employees that investors, not workers, will see most of the benefits of tax cuts.

At an internal town hall meeting on March 15, ADP CEO Carlos Rodriguez fielded an employee question on what the company planned to do with the savings from corporate tax cuts. Rodriguez alluded to other companies that have given bonuses to employees, but said that’s not what ADP had in mind. “You should expect that most of that benefit that we got as a result of tax reform, I think flows through to our investors,” Rodriguez told employees watching nationwide on a company feed. “I recognize that’s not a popular answer and not everybody’s going to like that answer, but I think that is really kind of where ADP is today.”

Yahoo Finance obtained a recording of Rodriguez’s comments. Here’s an audio file with his complete answer to the question:

On April 11, ADP raised its dividend by 10%, increasing returns to shareholders. Rodriguez, the CEO, owns about 125,000 shares of company stock, worth nearly $15 million, according to S&P Capital IQ. At least 10 other company officials own more than 25,000 shares in the company, so they are among the investors who will benefit if the stock price rises. Of course, it’s typical for CEOs to own shares in the companies they lead, and Rodriguez’s stake is not unusually large.

ADP’s shares have been flat so far in 2018, and they’re up about 13% during the last 12 months. That’s roughly in line with the S&P 500 index.

ADP’s stock, in blue, compared with the S&P 500, in green. Source: Yahoo Finance
ADP’s stock, in blue, compared with the S&P 500, in green. Source: Yahoo Finance

Critics of the Trump tax cuts have argued that slashing the corporate rate from 35% to 21% will boost profits and stock prices, benefiting the investor class—but do little to help ordinary workers. Rodriguez’s surprisingly candid remarks provide one example of a company that seems to be doing just that.

In a statement emailed to Yahoo Finance, Rodriguez confirmed that “we don’t have any plans for a one-time bonus due to tax reform.” ADP, he said, prefers a “pay for performance approach that directly links bonuses and merit increases to our performance, not one-time events. We are still considering other initiatives for associates.” The recent dividend increase “is consistent with our proud 43-year track record of annual dividend increases,” Rodriquez said, while reiterating that the company anticipates another dividend increase in November. And he pointed out that ADP has earned plaudits as a top workplace from LinkedIn and Fortune.

Still, the company has faced pressure recently from activist investor Bill Ackman, whose firm Pershing Square Capital Management has a 7.2% stake in the company. At a hedge-fund conference on April 17, Ackman said, “ADP is one of the biggest beneficiaries of tax reform of any U.S. corporation.” That’s because ADP operates mostly in the United States, leaving more revenue subject to lower tax rates than other large companies.

Last October, Ackman told Yahoo Finance’s Julia LaRoche that ADP is “one of the least efficient big companies,” while calling for moves to streamline and modernize the firm. He lost a proxy fight last year to install himself and two allies on the company’s board, but is still calling for reforms. At the April 17 conference, Ackman suggested tax cuts and other factors could push ADP’s net income more than 20% above the company’s current guidance by 2020.

“While we won the proxy contest,” Rodriguez said in his statement to Yahoo Finance, “we continue to work hard on executing our strategy and we give strong consideration to all the feedback we receive from investors regarding our business and board. With respect to Mr. Ackman, we maintain an open dialogue and will continue to do so.”

The Trump tax cuts are boosting profits at hundreds of companies. Yet they remain controversial, with just 29% saying they approve of the legislation in a recent NBC/Wall Street Journal poll. A Yahoo Finance survey conducted April 18 found many people feel the cuts favor the wealthy over the middle class and put too much financial burden on future taxpayers. They also think it’s fishy that tax cuts for businesses are permanent, while tax cuts for individuals are temporary.

Kevin Hassett, chairman of President Trump’s Council of Economic Advisers, defended the tax cuts in an April 17 op-ed in the Wall Street Journal. He cited evidence that the tax cuts have pushed wages up, spurred business investment and boosted productivity. The problem for Republican backers of the tax cuts is that many voters aren’t yet seeing the evidence Hassett is pointing to. A more visible flow of benefits to workers is one thing that might change that.

Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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