CINCINNATI - Procter & Gamble Co. has returned about $7 billion in foreign profits to the U.S., following passage of tax reform in December. But another $33 billion may never come back to this country, as P&G now considers those earnings “permanently reinvested” overseas.
P&G disclosed the new tax details in its annual report to shareholders, which was publicly released Tuesday. It devotes roughly two pages to the Tax Cuts and Jobs Act, which reduced the U.S. corporate tax rate to 21 percent, down from 35 percent, and imposed new taxes of up to 15.5 percent on foreign profits that were previously held overseas.
It’s the kind of disclosure dozens of U.S. companies are now making, as investors, economists, accountants and government officials try to gauge the impact of the sweeping tax reforms enacted by Congress last year.
President Donald Trump has repeatedly opined that $4 trillion would return to the U.S., a number that media fact checkers have described as overly optimistic.
Still, it’s clear from corporate earnings calls that overseas profits are finding their way back to U.S. company coffers.
“We completed our repatriation of just over $1 billion of international cash,” Symantec Corp. Chief Financial Officer Nicholas Noviello told investors Aug. 2. “We ended Q1 with approximately $2.3 billion in cash and short-term investments, with $1.6 billion held in the U.S.”
Bloomberg columnist Mark Whitehouse recently found some Federal Reserve data showing a dramatic shift in corporate profits in the first quarter following tax reform:
“Before 2018, U.S. nonfinancial corporations tended to add about $50 billion to earnings held abroad every three months. But in the first three months of 2018, that number turned to a negative $158 billion, according to the Federal Reserve. That's the biggest reversal on records going back to 1946, and much more than companies brought back in 2005, the last time the government tried something similar.”
Spokeswoman Jennifer Corso said P&G brought about $7 billion back to the U.S. in the 2018 fiscal year, which is about 14 percent of the $49 billion in “undistributed foreign earnings” that P&G reported on its books at this time last year.
The company did not provide a comparable number in this year’s annual report, but it did disclose that $11.4 billion in cash was still held by its foreign subsidiaries at the end of its fiscal year on June 30. That figure “declined versus the prior year,” said the filing, “primarily due to cash repatriations following the enactment of the U.S. Tax Act.”
P&G estimates it will pay $3.8 billion in repatriation taxes because of tax reform, but it also said it hasn’t made any estimates on tax liabilities for “approximately $33 billion of foreign earnings that are considered permanently reinvested.”
This isn’t the first time P&G has indicated that a portion of its foreign earnings might never return to the U.S., but it hasn’t given a detailed breakdown before now. P&G sells its products in 180 countries and has “on the ground operations” in 70 countries, according to the annual report. So, it’s not surprising that prior-year profits have already been reinvested in the business units that generated those profits.
Now that the money is back in the U.S., what is the company doing with it? The annual report offers some clues. P&G spent $7.3 billion on dividends to common and preferred shareholders in its 2018 fiscal year, an increase of $86 million over last year.
It also spent $7 billion on share repurchases, which indirectly benefit investors by reducing the number of shares outstanding and increasing earnings-per-share results. That can boost a company’s stock price, although it hasn't paid off for P&G just yet because its stock price is down nearly 10 percent year-to-date to $82.64 as of yesterday's close.
The company also reported a $400 million increase in capital spending to $3.7 billion, as it replaces older factories with more efficient mega-plants that produce and ship multiple products to retail and online customers.
One thing the money did not accomplish is job creation. P&G had 92,000 employees at the end of June, down 3,000 from one year ago and 37,000 less than 2011 – which was the year before P&G embarked on a series of restructuring programs that included the sale of 105 brands in its attempt to restore growth. Corso said local employment was unchanged last year at about 10,000, down from the 12,000 employees P&G had prior to its 2012 restructuring.