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Economic concerns may be shaping companies' response to thenew tax law, leading executives to opt foracquisitions and shareholder-pleasing tactics such as buybacks overriskier deployments of capital.

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Concerns about the outlook in the longer term led economists atthe International Monetary Fund in January to lower five-yearforecasts, even as they boosted prospects for this year andnext.

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IMF economists increased forecasts for U.S. economic growth thisyear by 40 basis points, to 2.7 percent from 2.3 percent, and by 60basis points for next year, to 2.5 percent. But they expect growthafter 2022 to be lower than initially projected, due in part to thetemporary nature of the tax provisions and their anticipated impacton the deficit.

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A group of economists surveyed by the Wall Street Journal, too,have indicated that they expect gross domestic product to slow to 2percent annually in 2020, compared with a current estimate of 2.8percent for the rest of this year.

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Executives clearly have been paying attention.

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A recent PricewaterhouseCoopers survey found that chiefexecutive officers of mostly large global corporations areextremely optimistic about their company's near-term prospects butare less so when looking to the longer term.

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Indeed, this is the first time since 2009 that more chiefexecutives in the PwC survey reported feeling only “somewhatconfident” about their prospects in the long term, compared withthose who said they feel “very confident” when looking fartherahead. The survey results were published in January.

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“There are so many reasons why businesses would handle thatmoney cautiously,” says Dr. Joel Naroff, president and founder ofNaroff Economic Advisors, speaking about corporate windfalls fromlower tax and repatriation rates. Naroff includes acceleratinginflation and rising long-term interest rates as two specificconcerns that company executives may be leery of.

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Another recent survey indicated similar corporatecircumspection.

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The Association for FinancialProfessionals reported last month that an unexpectedly smallpercentage of finance executives plan to open the corporate coffersthis quarter. Just 25 percent of respondents to the AFP's Corporate Cash Index study said they planto reduce their current cash holdings in Q1/2018, compared with 24percent who said they will increase cash stores, resulting in areading of “-1” in the AFP's index.

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A year ago, many more companies planned to spend down theircash—for example, retiring debt, buying back shares, or investingin capital equipment. When the AFP's January 2017 survey waspublished, the index came in at “-7”; 23 percent of respondentsexpected to save, compared with 30 percent who said they wouldspend.

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“When the Trump administration came into being, we saw a lotmore optimism,” says Mariam Lamech, director of survey research atthe AFP. “We were all very encouraged; people were telling us theywere going to spend vs. hold cash.

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“A reading of -1 could go either way so easily,” Lamechcontinues, “but we're not very excited about it. Last year, we werea lot more excited.”

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Since the January 2017 report, the Federal Reserve hikedinterest rates three times and the stock market plunged oninflation fears.

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Tax Law a Boon to Shareholders

Some larger companies have made no secret of their intent to optfor shareholder- and stock-market–friendly buybacks when theychoose to spend.

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Corporate stock repurchase programs are on a tear, withannounced plans totaling more than $178 billion as of mid-February,according to data from Birinyi Associates. The market researchfirm's data indicates that's a record.

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Companies such as Cisco Systems have led the way. Ciscoannounced earlier this month that after repatriating funds fromabroad at the more attractive new rate, it would boost its sharerepurchase program to a total of $31 billion, in addition toincreasing its per-share dividend by 4 cents, to 33 cents ashare.

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“We are going to continue to support the dividend and drive thatup with earnings,” Kelly Kramer, chief financial officer at Cisco,said on a conference call recorded by investing website SeekingAlpha. And, Kramer added, “We're going to be giving back to theshareholders through a healthy buyback.

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“I'll still be in a net cash positive position of $10 billion to$12 billion,” Kramer continued, noting, “we're going to continue tobe looking for the acquisitions that we can drive value and drivegrowth with.”

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Still, as Peter Frank, principal of PricewaterhouseCoopers LLPand head of its U.S. Corporate Treasury Solutions practice, noted,regardless of headlining stock repurchase programs and concernsover the economy, “It's very much 'to be determined' exactly howthe funds [from the corporate tax law] get allocated, mostlybecause companies haven't yet completely thought through thenuances of tax reform and what it will actually mean to them. Thereis a tremendous amount of complexity.”

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Frank says that as companies adjust to the impact of the lowertax rate, they will be able to access new money that they mayredeploy in as-yet-unexplored ways.

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“Companies are working through how that cash will be allocatedto different stakeholders,” he says, “including employees,suppliers, customers, and the business itself.”

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But until then, stockholders are clearly benefiting fromcompanies' short-term moves—buybacks and more aggressive mergersand acquisitions that can achieve results that match their horizonof economic surety.

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“The question is: What is the best return for them?” Naroffsays. “They're only going to invest if they think that they'regoing to get a return, and a good return, from their investment.”That means they've got to take a look not only at the next year,but three to five years down the road or more.

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“They're not as optimistic that there is going to be an extendedperiod of growth, and therefore either M&A, buyback stock,those are the things that really create a return, either to thecompany or to stockholders.”

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Hilary Johnson is a freelance journalistand contributor to Treasury & Risk who has alsowritten for Reuters, Barron's, Crain's New York Business, andGlobal Finance.

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