10-6-17 7:19 AM EDT | Email Article

By Philip van Doorn, MarketWatch

Smaller companies tend to derive most of their sales at home, making their income taxes simpler and more costly

After the tremendous response to our look at the income-tax rates of the largest U.S. companies (http://www.marketwatch.com/story/these-companies-may-enjoy-a-windfall-under-trumps-tax-plan-2017-09-29), we now follow up with a list of small-cap and mid-cap companies for which President Trump's proposed corporate tax cut might be even more important.

When we listed the median tax rates for the 30 companies in the Dow Jones Industrial Average (http://www.marketwatch.com/story/these-companies-may-enjoy-a-windfall-under-trumps-tax-plan-2017-09-29), we saw that seven had median income tax rates of more than 30%, while seven had median rates (which include any state or local income taxes, as well as federal income taxes) that were already below Trump's proposed 20%. The current federal corporate tax rate is 35%, one of the highest in the world.

We also listed the U.S. companies in the S&P 500 with the highest and lowest median income-tax rates (http://www.marketwatch.com/story/these-companies-may-enjoy-a-windfall-under-trumps-tax-plan-2017-09-29).

Jefferies analyst Steven DeSanctis called the president's tax proposal "a measly outline" in a report on Sunday, but also noted that small-cap stocks had been rallying since the Trump administration announced its proposal Sept. 27.

Here's how the S&P Small-Cap 600 Index , the S&P 400 Mid-Cap Index and the large-cap S&P 500 Index have fared since Sept. 26:

"History is repeating itself with [small-cap stock investors] jumping based on tax reform," DeSanctis wrote, because small-caps had also rallied to a greater degree than shares of larger companies during the heady days following Trump's election in November.

The logic behind the superior recent performance for small-cap and mid-cap stocks is that smaller publicly traded companies tend to derive a much higher percentage of their sales domestically. So they are not only subject to the high federal income-tax rate to a larger degree, but their business structure tends to be simpler and the tax shelters fewer.

A lot is riding on the ability of Congress and Trump to lower the corporate income-tax rate. Given the inability of the Republican-controlled House of Representatives and the Senate to pass any major legislation during Trump's presidency, the recent rally may pale in comparison to what may happen if a tax cut actually becomes law.

The data

A company's effective annualized income tax rate can be distorted to a large degree during any particular quarter or year, because of mergers, asset sales, legal settlements, impairment charges, accounting adjustments, etc. Because the rates can vary so wildly, we look at effective income-tax rates for the past nine reported quarters for U.S. companies included in the S&P Small-Cap 600 Index and the S&P 400 Mid-Cap Index, for which the data were available from FactSet. We included only companies for which the data were available for at least five of the past nine quarters. This left us with 854 companies, of which 157 had median effective tax rates below 20%.

Here are the 20 companies in the in the S&P Small-Cap 600 Index and the S&P 400 Mid-Cap Index with the highest median effective income tax rates, according to the methodology described above:

Company                                    Ticker   Industry                         Median effective income-tax rate - past nine reported quarters  Minimum effective tax rate  Maximum effective tax rate 
Clean Harbors Inc.                         US:CLH   Environmental Services                                                                      75%                         46%                        259% 
Brink's Co.                                US:BCO   Misc. Commercial Services                                                                   66%                         26%                        106% 
Regis Corp.                                US:RGS   Consumer Services                                                                           60%                         43%                        149% 
Providence Service Corp.                   US:PRSC  Misc. Commercial Services                                                                   57%                         43%                         73% 
Heidrick & Struggles International Inc.    US:HSII  Personnel Services                                                                          56%                         33%                         95% 
WellCare Health Plans Inc.                 US:WCG   Managed Health Care                                                                         56%                         35%                         65% 
Lumos Networks Corp.                       US:LMOS  Telecommunications                                                                          54%                         25%                         63% 
Molina Healthcare Inc.                     US:MOH   Managed Health Care                                                                         54%                         41%                         63% 
McDermott International Inc.               US:MDR   Oilfield Services/ Equipment                                                                53%                         28%                        623% 
Magellan Health Inc.                       US:MGLN  Managed Health Care                                                                         50%                         40%                         91% 
Rambus Inc.                                US:RMBS  Semiconductors                                                                              49%                     -1,109%                         71% 
Consolidated Communications Holdings Inc.  US:CNSL  Telecommunications                                                                          48%                         39%                         99% 
Evercore Inc. Class A                      US:EVR   Investment Banks/ Brokers                                                                   48%                         16%                         61% 
Aerojet Rocketdyne Holdings Inc.           US:AJRD  Aerospace & Defense                                                                         48%                         33%                         54% 
Barracuda Networks Inc.                    US:CUDA  Information Technology Services                                                             46%                        -14%                         68% 
Cogent Communications Holdings Inc.        US:CCOI  Telecommunications                                                                          45%                         14%                         61% 
ATN International Inc.                     US:ATNI  Telecomunnications                                                                          45%                         19%                        278% 
R.R. Donnelley & Sons Co.                  US:RRD   Commercial Printing/ Forms                                                                  45%                         -6%                        219% 
Resources Connection Inc.                  US:RECN  Personnel Services                                                                          45%                         41%                         49% 
Wisdom Tree Investments Inc.               US:WETF  Investment Managers                                                                         44%                         41%                         71% 
                                                                                                                                                                                            Source: FactSet 

Because skewed data could temporarily lead to high effective tax rates, we are also showing the minimum and maximum effective income tax rates for the nine-quarter period.

-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

10-06-17 0719ET

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