Child tax credit payments are an 'underappreciated stimulus,' Cowen says

• Child tax credit payments could lift sales across the retail, restaurant and travel industries, according to a research note by Cowen analysts.
• Parents and caretakers will get monthly payments from July to December.
• In the note, Cowen pointed to Walmart, Kohl's and American Eagle Outfitters as beneficiaries, particularly as families spend on groceries and back-to-school supplies.

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Child tax credit payments are an "underappreciated stimulus" that could lift sales across the retail, restaurant and travel industries — especially as shoppers emerge from the pandemic and get ready for back-to-school season, according to a research note published Tuesday by Cowen analysts.

The monthly payments, which begin Thursday, could benefit a wide range of companies from grocers like Walmart to fast food chains like Jack in the Box, according to the note.

Families have gotten child tax credits for years, but the American Rescue Plan made several key changes. It increased the amount per child from $2,000 to $3,000 for those between the ages of 6 and 17, and to $3,600 for each child under age 6. It qualified low-income families who have little or no taxable income. And it changed the way it is paid out, so that families receive half the money through direct deposits that run from July to December. Families will receive the other half after filing taxes.

That will translate to $250 or $300 per child each month. Families who make up to $150,000 for a couple or $112,500 for a family with a single parent, called a head of household; or $75,000 as an individual taxpayer will get the full amount. The payments will be phased out above that amount — but even those who get less money will receive advance payments.

Parents and caretakers of nearly 90% of children in the U.S. will receive the payments, according to the Internal Revenue Service.

Here are four major takeaways from the analysts:

More dollars mean more spending

The child tax credit will amount to an estimated $150 billion in stimulus over the next year, according to Cowen. Analysts at the equity research firm say the extra dollars may surprise both Americans and the economy at large, calling it "an underappreciated catalyst for discretionary consumer spend."

As people get the money, they predict families will spend it on food for the home, dining out and shopping online. They named retailers and restaurants that are best-positioned to attract those dollars. On the grocery side, they pointed to Walmart, Target and Grocery Outlet. Among fast-food chains, they named Jack in the Box, Wingstop, Papa John's and Darden, based on a survey of consumers that looked at their incomes and where they usually frequent. And among e-commerce companies, they called out Amazon.

Coinciding with 'pent up demand'

Many families have already ramped up spending on new shoes and clothes as they emerge from their homes after getting Covid-19 vaccinations. Analysts from Cowen said that child tax credit dollars will likely feed into that spending spree.

Already, some retail industry watchers have predicted an usually hot back-to-school season as families crave a new start and a sense of more normalcy — and potentially channel that toward fresh notebooks and first day of school outfits.

Cowen analysts expect that retailers that cater to back-to-school or team sports are positioned well to attract child tax credit dollars, including Walmart, Kohl's, Foot Locker, Dick's Sporting Goods and Nike. They also said retailers that focus on value, such as off-price retailers like Burlington, Ross and T.J. Maxx, could get a boost since they cater to low-income families that are receiving child tax credit payments. They also said American Eagle Outfitters is in a good spot to attract the payments, as it caters to styles that teens crave, such as looser-fitting denim and casualwear.

Spilling over into adult categories

Parents, grandparents and other caretakers may spend some of the child tax credit dollars on themselves in the form of beer, cigarettes and plane tickets, according to Cowen.

Analysts estimated that the tobacco industry could pick up about $1.2 billion and alcoholic beverages could pick up roughly $2.7 billion of the estimated $150 billion impact of the child tax credit. That could mean good news for tobacco company Turning Point Brands and beer industry players, Constellation Brands and Boston Beer.

It estimated air travel will get an approximately $1.15 billion bump from child tax credits, as the July payments arrive just in time for vacation season. That will be most noticeable for airlines that cater to leisure travel and lower prices, like Allegiant, Frontier and Spirit, the analysts predicted.

A renewal looks likely

The monthly payments will end in December — but Cowen analysts are betting that they will be renewed. In the note, they said they expect the one-year program will be extended through 2025 through a reconciliation bill.

In the note, the analysts said the huge size and scope of the government program, which is intended to fight childhood poverty. They called it a "huge policy change" that acts as "universal basic income for low-middle income parents."

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