Sunday , 25 September 2022

Inflation Reduction Act: Here Are Some Winner & Loser Stocks

…It looks like the Inflation Reduction Act is about to become reality – and this is one of the most significant pieces of legislation in years –  and it has major implications for American environmental policy and prescription drug prices. This article looks at some of the potential winners and losers of the Act. @$$4$

…The Inflation Reduction Act bill would:

  • plow $369 billion into renewable energy investment, including wind and solar projects, with a goal of reducing carbon emissions by 40% by 2030,
  • expand tax credits for electric vehicle (EV) purchases and promote U.S. energy independence and, among other things,
  • enable Medicare to negotiate drug prices for the first time, potentially lowering prescription costs for both patients and taxpayers.

To pay for all of this, the bill would:

  • levy a 1% tax on all corporate share buybacks and
  • levy a 15% minimum corporate income tax on any company with more than $1 billion in revenues…

Below is a look at some of the potential winners and losers of the Inflation Reduction Act.

Winners

1. Tesla (TSLA)

…Tesla was an early beneficiary of federal taxpayer subsidies for EV purchases but, unfortunately, the company also became a victim of its own success. By  2018, Tesla had already sold more than 200,000 electric vehicles, which meant that they had exhausted their government allowance… and that buyers were no longer entitled to the $7,500 credit. This put Tesla at a major disadvantage to younger startups or to traditional automakers that had only recently dipped their toes into the EV market, as its products were effectively $7,500 more expensive. The Inflation Reduction Act lifts the cap, thus making Tesla EVs eligible for the subsidy again…[and] this may have been just the shot in the arm that Tesla’s shares needed. One caveat: The rebate only applies to cars priced under $55,000 so Tesla might need to sell a cheaper model or a slimmed down version of its Model 3 if it is to take full advantage.

2. Albemarle (ALB)

A major investment in renewable energy and in electric vehicles can only mean one thing: a massive increase in demand for energy storage. EVs depend on large battery packs, and storage is a critical part of making solar and wind energy viable replacements for fossil fuels. After all, the sun doesn’t shine at night, and the wind doesn’t blow all the time. Demand for battery storage means demand for lithium, and that’s good news for major lithium producers like Albemarle.

Without the raw materials that ALB produces, there could be no Tesla or any other electric vehicle but, beyond that, there could be no iPhone or battery-powered laptop computer either. Virtually every wireless electronic gadget you own depends on a lithium ion battery – and those batteries depend on the mining and production of high-quality lithium…

Demand for lithium was already strong long before the Inflation Reduction Act was dreamed up, and demand would continue to be strong even if the bill somehow died in the House of Representatives, but the potential increase in demand due to the bill’s climate provisions will only turbocharge ALB even higher.

3. Energy Transfer (ET)

The Inflation Reduction Act…forces the government to make a decision on whether or not to issue a permit for infrastructure, including pipelines within two years. Major pipeline projects, including the Dakota Access and the Keystone pipelines, have been political hot potatoes over the past decade and eliminating some of the uncertainty surrounding new projects – and forcing the government to give a straight answer in a reasonable timeline – is a major plus for pipeline operators and particularly serial growers like Energy Transfer…

ET operates over 120,000 miles of pipeline assets, and approximately 30% of all American natural gas flows through Energy Transfer assets.  Natural gas is considered…an interim step in transitioning away from dirty coal into clean renewable energy but that we may…[take years] and, in the meantime, there is money to be made.

4. NextEra Energy (NEE)

The stated aim of the bill, apart from lowering inflation, is to make the U.S. energy grid greener. As such, $113 billion is earmarked to encourage the building of new renewable electricity plants which should be  boon to NextEra Energyand other utility operators with a major presence in renewable energy. NEE has ambitious plans in place to eliminate its carbon emissions entirely. Already, the company is the world’s largest producer of wind and solar energy.

…If the bill is successful in advancing the transition to electric vehicles, then demand for electricity will naturally rise and the same holds true for appliances, hot water heaters and home heating systems. While we will still be using natural gas in existing construction for decades, new construction will depend far more heavily on electricity.

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Possible Loser

1.  Apple (AAPL)

Whether or not Apple is a winner or loser here will depend on how the company reacts to the tax on stock buybacks. Apple spent over $85 billion on repurchases last year, and in the past decade, that number was close to half a trillion – and that was before the company announced a new $90 billion buyback plan back in April.

…While those buybacks are testament to the company’s massive success and almost unbelievable ability to generate mountains of free cash flow…This amount of buying pressure from Apple’s treasury has clearly had an impact on the share price…[which wouldn’t be as high as it is today] without all of that additional buying so anything that curtails buybacks going forward would be a potential risk for Apple shareholders. [That being said,] Apple could:

  • choose to plow some of that buyback money into higher dividends or even into a one-time special dividend,
  • further strengthen their already fortress-strong balance sheet by paying down debt or just
  • continue with its buyback plans and consider the tax a cost of doing business. The 1% levy really isn’t going to make or break the company.

So, while Apple is a potential investing loser of the Inflation Reduction Act… it’s not likely to lose all that much, and neither are its fellow buy-back hoovering tech competitors, such as Meta Platforms (META) and Alphabet (GOOGL).

Losers

1.  Johnson & Johnson (JNJ)

Big Pharma will have to negotiate with Medicare going forward and, since Medicare pricing tends to drive the pricing by private insurance companies as well, the impact on drug costs should be significant…That said [however,]…the law phases in negotiation in stages, with only 10 drugs (we don’t know which drugs will make the first cut yet) subject to negotiation in 2026 – and newer drugs would not be eligible for negotiation until at least 9 years after their release.

While none of the above is particularly good for Big Pharma giants like Johnson & Johnson, the phased nature of the negotiation will not have an immediate impact on JNJ’s profitability but it’s coming, so investors should be prepared.

2. Amazon.com (AMZN)

AMZN happens to be a pioneer in legal tax avoidance. Despite generating $35.1 billion in U.S. profits in 2021, the company enjoyed a federal income tax rate of just 6.1%, according to the Institute on Taxation and Economic Policy.

Amazon did nothing “wrong” by avoiding taxes- it simply took advantage of the opportunities presented…[but] under the Inflation Reduction Act, companies with at least $1 billion in profits would be required to pay a minimum tax rate of 15% on their reported profits so, going forward, it’s going to have to share a bigger chunk of it with Uncle Sam, which means less for those invested in AMZN stock.

The above version of the original article by Charles Lewis Sizemore, CFA (kiplinger.com) has been edited ([ ]), abridged (…) and reformatted for the sake of clarity and brevity to provide the reader with a faster and easier read.
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