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interest tax shield later in this report). Deleveraging balance sheets may also be spurred by a continued environmwnt of rising interest. Leverage for S&P non-Financials has steadily been ticking up over the last few years, and, if we exclude the cash-rich Technology sector, leverage is approaching all-time highs (Chart 9). Table 9: S&P 500 valuations: October 2004 vs. today Metric 10/31/2004 Today (12/31/16) Fwd P/E 15.6 16.9 Trailing P/E 16.7 22.0 Median Fwd P/E 16.2 173 PIB 28 29 EV/EBITDA 11.6 W7 PIS 15 20 EviSales 2.2 23 Source: FactSet, S&P, BofA Merrill Lynch US Equity & US Quant Strategy Exhibit 1: BofAML Global Fund Manager Survey (January 2017): What would you most like to see companies do with cash flow? Chart 8: Average Annual Return of Russell 1000 Top Quintiles by factor (1986-present) - we a4 ed a a a CR | RSS Sa eS eee Sa SS Re [coed Ga ee | 02 03 O4 05 O06 OF O08 O39 10 11 12 13 14 15 «16 — Return cashto shareholders (share buybacks / dudand payments / cach squatters) —— Increase capitd ng spend —— Improve balance sheets (repay debt, top up company panaian plan) Source: BofA Merrill Lynch Global Fund Manager Survey (17 January 2017) Potential EPS impacts 16% 14% 12% 10% 8% Benchmark High Share Repurchase INEXPENSIVE Companies with High Share Repurchase Note: valuation factor used to determine inexpensive companies is FCF/P Source: FactSet, BofA Merrill Lynch US Equity & US Quant Strategy Chart 9: Net Debt/EBITDA for the S&P 500 ex Financials (and excluding Energy and Tech) 35 3.0 25 2.0 15 1.0 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 oe S&P 500 ex Financials === S&P 500 ex Fins. & Energy ---— Avg. oo= S&P 500 ex Fins. & Tech Source: FactSet, BofA Merrill Lynch US Equity & US Quant Strategy $8-9 (6-7%) hit to GAAP EPS from the mandatory tax on accumulated overseas profit We estimate that a tax of accumulated overseas profits of $1.2tn would result in a cash tax impact of $100-120bn (which may be allowed to be paid over 8-10 years), and a one-time hit to GAAP EPS of $8-9 (a lower $65-80bn, given that a several large multinationals such as AAPL already provision for US taxes on a portion of their overseas profit, resulting in effective US tax rates well above the US statutory rate}. Our analysis assumes Trump’s/the Blueprint’s proposed rates of 8.75%/10%, and that all overseas profits are hit with this one-time tax, as suggested by their plans. See Table 10. Note that our estimate of ~$1.2tn of cumulative profits overseas is based on estimates from us, our fundamental analysts, and company filings, where in many cases only overseas cash but not other indefinitely invested earnings are disclosed/estimated. Thus, the tax on these earnings could be slightly higher, though the Blueprint would tax earnings not held in cash at a lower 3.5% rate. (We conservatively assume our estimated $1.2tn is all cash and use the higher 8.75% rate under the Blueprint and 10% under Trump’s plan in our below analysis}. 10 Equity Strategy Focus Point | 29 January 2017 BankofAmerica <2” Merrill Lynch HOUSE_OVERSIGHT_023078