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Investing.com - Changes to bonus depreciation for business equipment purchases and tax breaks for interest expenses should support cash flows at North American telecommunications operators, according to analysts at Citi.
The sweeping tax-cuts and spending bill signed into law by U.S. President Donald Trump on Friday returns expensing of investments in depreciable assets like gear and qualified improvement property to 100%. Under prior law, so-called bonus depreciation would be phased out by 20% until reaching 0% in 2027.
Meanwhile, Trump’s signature fiscal package expands the scope of a 30% tax break on interest expenses for businesses. The law essentially changes the definition of adjusted taxable income to earnings before interest, tax, depreciation and amortization -- known as EBITDA. Previously it referred to earnings before interest and taxes, or EBIT, meaning that the alteration should raise the amount of business interest that can be deducted.
New targets to increase licensed spectrum availability for the telecoms sector were also folded into the legislation.
Taken together, the Citi analysts argued in a note that the bill represents a "net positive" for companies in the industry that they cover, boosting average annual free cash flow for these firms by 10% in 2025 and raising the median net present value -- a gauge of projected profitability -- above their current expectations.
"We view the greater-than-expected tax benefits as a positive catalyst for the services stocks within our coverage," the analysts wrote.
"Investor interest may widen for some of the cheaper stocks within our coverage on the prospects of better free cash flow, greater flexibility to invest for revenue growth, and the potential to pull forward the timing of buybacks."
Factoring in the changes, the analysts highlighted AT&T (NYSE:T), saying the company may now have additional financial flexibility to accelerate share repurchases. The stock was given a "buy" rating and named Citi’s "top pick" in the sector.
They also reiterated "buy" outlooks for Verizon (NYSE:VZ) as well as Comcast (NASDAQ:CMCSA) and said Louisiana-based Lumen Technologies’ (NYSE:LUMN) balance sheet could be an "under-appreciated beneficiary" of the changes.