What Verizon might do with its $17B tax windfall

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Verizon stands to notch a gain of $17 billion from the new U.S. tax law. (Getty/jackaldu)

Verizon said it will book nearly $17 billion in gains in its fourth-quarter profits due to the new U.S. tax law, and analysts are now speculating on what the telecom carrier might do with its payout.

“Potential options include: (1) Increased Wireless network investment (ie: fiber), given the benefits to both the broader business/5G strategy, as well as lift from bonus depreciation (ie: ability to expense 100% of capex for cash tax purposes),” wrote the analysts at Deutsche Bank Markets Research in a note to investors issued yesterday.

Continued the DB analysts: “Note that at a recent competitor conference, VZ’s CTO noted the company was unlikely to meaningfully increase capex (vs. the ~$17bn it’s previously discussed) as a result of tax reform. (2) Inorganic activity (M&A), as VZ may look externally at strategic assets it can use to enhance its growth profile, or (3) Accelerated shareholder returns, including greater dividend increases and/or share buybacks.”

Importantly, the analysts wrote that Verizon is likely the top beneficiary among telcos of the government’s recent tax reform push.

Verizon this week disclosed that the new reduction in the corporate income-tax rate—to 21% from the previous 35%—will slash its $48.3 billion deferred tax liabilities by $16.8 billion. As The Wall Street Journal pointed out, that one-time change will add $4.10 to Verizon’s 2017 earnings per share—a significant boost considering analysts had estimated Verizon’s 2017 earnings reaching $3.68.

As the Wall Street Journal noted, Verizon’s per-share profit in 2016 was $3.21.

Verizon isn’t the only company reacting to the new corporate tax rate. Immediately after the legislation passed, AT&T and Comcast both announced an increase in capex alongside year-end employee bonuses. More recently, Apple said it would increase its Advanced Manufacturing Fund from $1 billion to $5 billion, create 20,000 new jobs and contribute over $350 billion to the U.S. economy over the next five years.

As for Verizon’s upcoming fourth-quarter earnings report, the DB analysts said they expect the carrier to report declines in service revenues but increased wireless EBITDA that will exceed street expectations “given much more disciplined promotional activity this holiday season.”

The firm said it expects the carrier to report postpaid phone net additions of 299,000, which they noted is a figure above average Wall Street expectations of 282,000.