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No alpha from repatriation and multiples actually compressed
Our analysis of the top 15 repatriating companies (from Table 7) suggests that while these companies initially outperformed both the S&P 500 and equal-weighted S&P 500 from November 2004-April 2005 (by 6ppt and 5ppt, respectively), they subsequently underperformed during the remainder of 2005 and early 2006 (Chart 6). From the end of September 2004 through year-end 2006, these stocks were up 27% on average, in-line with the overall S&P 500, and below the equal-weighted benchmark's 36% return. And multiples for these stocks compressed over the majority of this period, both on an absolute basis and relative to the benchmark (Chart 7).

Chart 6: Cumulative relative performance (equal-weighted) vs. S&P 500 and EW S&P 500 of Top 15 repatriating companies, 9/30/04-12/31/06
[Chart Graphic]
Top 15 vs. S&P 500
Top 15 vs. EW S&P 500
Source: U.S. Senate Permanent Subcommittee on Investigations survey (for Top 15 repatriating stocks), FactSet, Bloomberg, BofA Merrill Lynch US Equity & US Quant Strategy

Chart 7: Fwd. P/E of Top 15 repatriating companies - absolute and relative to the S&P 500 median fwd. P/E, 9/30/04-12/31/06
[Chart Graphic]
Top 15 Fwd P/E (LHS)
Top 15 Rel Fwd P/E vs. Median S&P 500 Fwd P/E (RHS)
Source: U.S. Senate Permanent Subcommittee on Investigations survey (for Top 15 repatriating stocks), FactSet, Bloomberg, BofA Merrill Lynch US Equity & US Quant Strategy

Post-repatriation cash use: will this time be different?
Valuations, investor preference, growth & leverage ratios suggest less buybacks
While any potential restrictions on the use of repatriated earnings are still unknown, we suspect that a pick-up in buybacks is likely, but that a lower proportion will be used for buybacks today than during the last repatriation holiday. Valuations were generally more attractive in 2004-2005 on most metrics (Table 9), and we've found that buybacks tend to be more rewarded when stocks are cheap (Chart 8). Additionally, the largest buybacks have not generated alpha for the last several years, as investors have increasingly agitated for companies to use their excess cash on pro-growth investments (namely capex.) According to BofAML's latest Global Fund Manager Survey, 60% of investors want companies to increase capex spending, vs. 17% who want companies to return cash to shareholders (Exhibit 1). This compares to a majority of investors desiring companies to return cash to shareholders when the HIA was passed in late 2004.

Companies may also feel less pressure to bolster per share metrics by reducing share count if top line is recovering and organic growth is finally materializing. And from a capital structure perspective, if leverage loses its tax benefit, given that leverage ratios are already high (see below) companies may be less likely to reduce their equity capital base, as that would marginally increase their weighted average cost of capital.

Special dividends, pay-down of debt may be other likely uses
Companies may also return the cash to shareholders by issuing a one-time special dividend: income remains in-demand, given that both interest rates and dividend payout ratios remain historically low. And if a repatriation tax holiday comes within the context of broader tax reform that includes an end to the deductibility of interest expense, companies may choose to pay down debt over other uses of cash, in an attempt to skew their balance sheets less toward debt and more toward equity (see the section on no

Bank of America Merrill Lynch
Equity Strategy Focus Point | 29 January 2017
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