Walmart, AT&T, and Starbucks, to name a few, have already passed on the tax cuts to their employees, in the form of pay increases and bonuses. Here are five alternatives that companies have, and how they affect their shareholders.
1. Raise employee pay or bonuses
Paying employees higher salaries doesn't have an immediate positive impact on shareholders. Yes, it makes for happier employees, and happier employees can improve customer service or production efficiency. However, over time, as more companies increase pay, it stops becoming a differentiator and simply sets a new salary bar for all companies. Offering bonuses does not do that, but also does not provide shareholder value. Finally, there is no proof that financial incentives increase creativity.
2. Buy back stock
When companies have extra cash, they often buy stock back from their shareholders. It offers shareholders better liquidity than the demand generated through the stock markets. But if shareholders haven't been planning to sell their holdings, they will not benefit from the buyback. Besides, stock buybacks typically take place when the stock price is low.
3. Spend it
Sometimes when companies have extra cash, they spend it on things they don't really need, such as outrageously expensive buildings in prime locations or increases in individual spending allowances. This spending does not generate any growth, and typically requires higher maintenance costs in the future, reducing future earnings as well. Shareholders do not benefit from such spending.
4. Pay dividends to shareholders
While shareholders benefit from dividends, offering them prevents the company from investing in anything else, from capacity to employees to research and development. No doubt that shareholders would enjoy increased dividends because of a reduction in corporate tax, but over time those rates would become the benchmark. The benefit would be short term.
5. Reinvest in the company
The best long-term benefit to shareholders comes if companies reinvest the increased profit due to lower taxes in building more capacity, in developing new products or services, or in any other activity that will increase the top line revenue in the long term. Revenue growth without significant operating expense growth yields a much higher net profit increase, which shareholders enjoy more than simply receiving increased dividends.