In 2002, we removed foreign issues from the S&P 500. However, being an American company (or defined as an American company) doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels remain difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intracompany sales—and hence, profits—are sometimes structured to take advantage of trade, tax, and regulatory policies. Changes in domicile, inspired by tax savings, have also changed the technical classification of what is considered foreign. Therefore, the resulting reported data available to shareholders is significantly less substantial and less revealing than the data that would be necessary to complete a truly comprehensive analysis. However, using the data that is available, we do offer an annual report on foreign sales, which is designed to be a starting point that provides a unique glimpse into global sales composition, but it should not be considered a statement of exact values.
Reporting of global sales again improved somewhat in 2017, but once more it was a slight improvement and the overall quantifiable reporting remained poor. While measured messages from senior management abound, tabular charts—not generally required under Generally Accepted Accounting Principles (GAAP)—are reported by only one-half of issuers. Market participants may need to be careful when determining what data and statistics to use. To illustrate this point, based on the current 2017 reports, foreign sales appear to account for 27.2% of total S&P 500 sales (26.7% in 2016, 28.4% in 2015, and 31.0% in 2014). However, if we use only the companies that reported foreign sales, the rate increases to 38.5% (38.9% in 2016, 40.5% in 2015, and 44.5% in 2014). If we eliminate some of the “stranger” values, such as companies reporting at 100% (due to domicile) or reporting a zero rate due to where (and how) the sales were booked (having a zero foreign rate and several foreign plants and outlets leaves some reason for doubt), the rate calculates to 43.6%, up from 2016’s 43.2%, which was down from the 44.3% posted in 2015, and significantly down from the 47.8% reported in 2014 (see Exhibit 1). This adjusted rate, 43.6%, is the rate we use for guidance and as a “holding spot” for the actual value of higher-level index and sector attribution.
The overall 2017 results show that foreign sales as a percentage of total S&P 500 sales slightly increased to 43.62% from 43.16% in 2016 (2015 was 44.35% and 2014 was 47.82%). On a pro forma basis, looking only at current issues in the index that declared foreign sales and their current history (as compared with the actual time series, which is based on the historical membership), the slightly increased figure for 2017 becomes a tick lower than the pro forma 2016 rate of 43.65%, which from a statistical view is flat (more a result of membership and reporting). Both views support that there was little change for 2017 over 2016, after the declines in 2015 and 2014.
On the tax front, which continues to be a hot political and board room issue (as recent tax changes addressed some of the global competitiveness of tax rates, as well as repatriation), Exhibit 3 shows us that more taxes continue to be paid to Washington on both an aggregate and percentage basis than to foreign sovereigns. In 2005, S&P 500 companies sent 60.6% of their income tax payments to Washington (USD 141.5 billion) and 39.4% abroad (USD 91.8 billion). The Washington percentage declined to 45.3% in 2011, but it then posted four years of significant increases in 2015, as 66.8% of the payments went to Washington (USD 184.4 billion) and 38.2% went abroad (USD 91.4 billion). For 2016, the percentage of taxes paid to Washington declined for the first time since 2010, to 65.2% of all income taxes. For 2016, issues paid USD 160.5 billion to Washington, a 13.0% decline, equating to a USD 23.9 billion reduction, while they paid USD 85.6 billion to foreign governments, a 6.3% decline, equating to USD 5.8 billion in lower payments. In 2017, taxes paid rebounded from their 2016 drop and increased from 2015 to post their highest level since at least 2003 (when my records start). Specifically, for 2017, S&P 500 issues paid USD 104.5 billion in income taxes to foreign governments, a 22.1% increase from their 2016 USD 85.6 billion payment, as they paid the U.S. government USD 207.2 billion, up 29.1% from the USD 160.5 billion payment seen in 2016. On a percentage basis, U.S. payments accounted for 66.5% of all income tax payments, up from 65.2% in 2016, but down from 2015’s 66.8% (which was the highest rate since at least 2003, when my data begins).
The energy sector’s share of foreign sales posted its first decline after six years of increasing, falling to 54.1% from 2016’s 58.9% (2015 was 57.9%, 2014 56.2%, and 2013 54.6%), as oil prices and related services and equipment sales increased in 2017, with the domestic component increasing more. The sector had the largest proportion of reported foreign sales for the second year in a row. Several items point to a potential change in energy’s position going forward. For the first half of 2018, oil prices and energy equity prices increased, as initial first half 2018 sales increased 26.7% (S&P 500 energy sector) year-over-year, with the U.S. now producing more energy-related products (oil and gas) and permitted to export some of it. The information technology sector, which had lost its first place setting for having the largest foreign exposure to energy last year, regained the title, even as its exposure declined to 56.8% in 2017 from 2016’s 57.2% (57.8% in 2015 and 59.49% in 2014). The foreign sales rate among financials companies increased to 31.2% from 2016’s 30.8%, which was a decline from 31.1% in 2015 and 31.2% in 2014. The sector’s rate has remained relatively flat over the past five years. Real estate, which was created in September 2016 (spun off from financials), had limited information as most issues did not report foreign sales, with the few that did report coming in at 41.7%.
In Exhibit 2, regional data show that European sales continued to increase, if only by a tick this year, representing 8.14% of S&P 500 sales in 2017, up from 8.13% in 2016, which was up from 7.79% in 2015, 7.46% in 2014, and 6.80% in 2013, which had declined significantly from the 9.69% reported in 2012, 11.08% in 2011, and 13.48% reported in 2010. UK sales represented 1.12%, up from 1.10% in 2016, and down from 1.86% in 2015, which was up from 0.89% in 2014. European sales excluding the UK increased to 7.02% in 2017, virtually flat from 7.03% in 2016; 2015 was 5.93% and 2014 was 6.58%. Asian sales decreased to 8.26% from 8.46% in 2016, which was up from 2015’s 6.77%, as it continued to hold the title for the most regional foreign sales, which it had taken from Europe last year. Within Asia, Japanese sales declined to 1.51% of S&P 500 sales from 1.52% in 2016, which was up from 2015’s 1.15% and the 0.50% rate from 2014. African sales decreased to 3.90% in 2017 from 3.97% in 2016 and from 2.61% in 2015. Sales to Canada declined to 2.16% from 2016’s 2.67%, after declining significantly to 1.17% in 2015 from 3.51% in 2014 (oil-related sales were seen as a contributing factor). The largest “region” declared unfortunately continues to be a generalized area, which we classify as “foreign countries,” meaning that no further country or regional breakdown was given. For 2017, 43.39% of the issues that reported foreign sales used this category and did not break down their regional sales, up from 40.58% in 2016, but down from 49.19% in 2015 (46.43% in 2014). The “foreign sales” category represented 18.5% of all S&P 500 sales, up from 17.5% in 2016, but still down from the 21.8% representation in 2015 (22.2% in 2014). The lack of specifics in reporting remains a roadblock to analysis.
As I have noted in several prior reports, it would be helpful if there were current legislative or policy proposals to require detailed reporting, but there are not. Even as trade and tariffs have become a major issue in policy, comprehensive data remains unavailable, with the market often reacting to events (or potential policy changes) as they occur. Compounding the issue, companies often prefer not to S&P 500 2017: Global Sales August 2018 RESEARCH | Core 5 report the actual values. From an investor perspective, it would be beneficial to be able to create a matrix based on production and sales that accounts for parts made in China, assembled in Europe, and sold in the UK, with profits translated into U.S. dollars. Investors could then fill in the currency rates and see the income impact.
The bottom line, however, is that we use what we have, and for now, we are using 43.62% as a holding position for foreign sales as a percentage of total S&P 500 sales, up from 2016’s 43.16%, which was a decline from 2015’s 44.35% and 47.82% in 2014. Our working number for Asia is 8.26% (down from 8.46%), and the working number for Europe is 8.14% (up from 8.13%), with 1.12% coming from the UK (1.10%).
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