Overseas cash restricts Apple's options for reallocating capital

Posted:
in AAPL Investors edited January 2014
With Apple actively exploring potential uses for its $137 billion in cash and investments, bringing all of that money back to the U.S. would be a costly move.

About 70 percent of Apple's cash balance is held overseas, and repatriating that money would have it taxed at America's 35 percent corporate rate. As noted by analyst Amit Daryanani of RBC Capital Markets, that means bringing the money stateside would cost Apple $33 billion.

But Apple also currently has $43 billion in cash domestically, which Daryanani believes, along with another $45 billion in annual free cash flow, provides Apple enough room to return additional cash to investors.

Cash
Apple added $38 billion in cash in 2012. Chart by Asymco.


Scrutiny of Apple's $137 billion in cash and investments grew considerably on Thursday after it was announced that David Einhorn, the high-profile hedge fund manager behind Greenlight Capital, has sued Apple over what he believes is a "cash problem" for the company. Einhorn believes Apple should return some of its cash to investors in the form of perpetual preferred stock with a 4 percent yield.

Apple quickly responded and reiterated that the company has been holding "active discussions" on what to do with its massive sum of cash. Apple also promised to "thoroughly evaluate" the proposal from Greenlight Capital.

The discussions suggest Apple's upcoming annual shareholder meeting could be particularly interesting, though Daryanani doesn't expect the Feb. 27 event to bring about any changes to the company's capital allocation policy.

"Given Apple's history of announcing products and changes to capital allocation policy through company specific events, we believe any change to capital allocation policy would likely occur in the March time frame after the annual shareholder meeting," he said, noting that Apple announced their dividend buyback on March 19 of last year.

Daryanani believes Greenlight's proposal would "get the stock moving upwards in the near-term." He also said that Apple has "ample cash" to fund a new, larger dividend.

RBC Capital Markets has an "outperform" rating for AAPL stock with a price target of $600. The firm believes Apple deserves to trade at a slight premium to the S&P 500.
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Comments

  • Reply 1 of 99
    blastdoorblastdoor Posts: 2,362member
    Here's a question:

    Could Apple use cash held internationally to buy back AAPL stock on foreign stock exchanges without having to pay US tax?

    I'm not a lawyer, but it seems like if foreign cash is being used to buy AAPL on a foreign exchange, then that cash would never come under the purview of US taxes.

    Yet, the benefit to stockholders would be the same as if Apple conducted a stock buy-back on an American exchange using domestic cash (because stock is fungible across borders).

    Is this the perfect loophole?
  • Reply 2 of 99
    jragostajragosta Posts: 10,473member
    One thing that the analyst has missed is that Apple has already reserved cash to cover taxes for much of the money stashed overseas. So bringing it back would not affect their P&L. It would, however, affect their balance sheet.

    Of course, the flip side of that is that if Apple uses the cash overseas and does not repatriate it, they will get a gain by reversing the reserves.
  • Reply 3 of 99
    The "perfect loophole" that would have brought money back to the US, stimulated the economy, and intern created more tax revenue without raising taxes. Didn't get elected last November.
  • Reply 4 of 99
    By "costly" to Apple what you actually mean is "paying their fair share of taxes instead of hiding profits offshore."

    If they can't use the money because they'd have to pay some of it in taxes, they have $137 billion doing nothing and going to waste. If they bring it back to the U.S. they'll have over $100 billion that can be used.

    Which would you prefer, a bunch of money you can't touch, can't do anything with, and is doing nothing for you, or tons of money that can be used?
  • Reply 5 of 99
    melgrossmelgross Posts: 32,960member
    jragosta wrote: »
    One thing that the analyst has missed is that Apple has already reserved cash to cover taxes for much of the money stashed overseas. So bringing it back would not affect their P&L. It would, however, affect their balance sheet.

    Of course, the flip side of that is that if Apple uses the cash overseas and does not repatriate it, they will get a gain by reversing the reserves.

    Yes, I was going to comment on that. In fact, they put over $14 billion away for that last quarter. This can be a confusing topic.
  • Reply 6 of 99
    melgrossmelgross Posts: 32,960member
    don108 wrote: »
    By "costly" to Apple what you actually mean is "paying their fair share of taxes instead of hiding profits offshore."

    If they can't use the money because they'd have to pay some of it in taxes, they have $137 billion doing nothing and going to waste. If they bring it back to the U.S. they'll have over $100 billion that can be used.

    Which would you prefer, a bunch of money you can't touch, can't do anything with, and is doing nothing for you, or tons of money that can be used?

    Apple pays their fair share. As much or more than most other companies in the same situation. And, by the way, if it's legal, it's fair. I expect a company to do what's legal to save money, and that includes taxes. All multinational companies are in this position. Google, Microsoft, and others do the same thing. You should tar all equally if you don't understand how this works.
  • Reply 7 of 99
    don108 wrote: »
    By "costly" to Apple what you actually mean is "paying their fair share of taxes instead of hiding profits offshore."

    If they can't use the money because they'd have to pay some of it in taxes, they have $137 billion doing nothing and going to waste. If they bring it back to the U.S. they'll have over $100 billion that can be used.

    Which would you prefer, a bunch of money you can't touch, can't do anything with, and is doing nothing for you, or tons of money that can be used?

    They can use the money. If the bulk of their future growth is to come from overseas it makes sense both from a financial and business standpoint to keep the money there. After all, expansion into China and all these new research facilities overseas is being paid for with these funds isn't it? It's no different than Toyota building cars here to minimize costs and taxes. Apple knows what they are doing and anyone who has invested in Apple in the last two decades knows how Apple operates. It is nothing new.
  • Reply 8 of 99
    blastdoor wrote: »
    Here's a question:

    Could Apple use cash held internationally to buy back AAPL stock on foreign stock exchanges without having to pay US tax?

    I'm not a lawyer, but it seems like if foreign cash is being used to buy AAPL on a foreign exchange, then that cash would never come under the purview of US taxes.

    Yet, the benefit to stockholders would be the same as if Apple conducted a stock buy-back on an American exchange using domestic cash (because stock is fungible across borders).

    Is this the perfect loophole?

    They'd have to move it to Germany, as their only other SE is APC.F
  • Reply 9 of 99
    e1618978e1618978 Posts: 6,075member

    Quote:

    Originally Posted by Don108 View Post



    By "costly" to Apple what you actually mean is "paying their fair share of taxes instead of hiding profits offshore."



    If they can't use the money because they'd have to pay some of it in taxes, they have $137 billion doing nothing and going to waste. If they bring it back to the U.S. they'll have over $100 billion that can be used.



    Which would you prefer, a bunch of money you can't touch, can't do anything with, and is doing nothing for you, or tons of money that can be used?




    A French person buys an iPod made by a Chinese person, why does the US government deserve a cut of that?

  • Reply 10 of 99
    I love Apple but they need to pay their taxes like the rest of us, along with the other corporate welfare recipients!
  • Reply 11 of 99
    One interesting thing to watch would be Amazon's performance once sales taxes are applied throughout the states. A lot of people complain about Apple's tax strategy but those same people I bet buy online and pay no sales tax in the U.S. nor do they declare it on their taxes. It probably won't kill their business because of the convenience and other factors, but it could make going to a closer retail store to get those items at the same price and faster a more attractive proposition for items readily available.
  • Reply 12 of 99
    e1618978 wrote: »
    A French person buys an iPod made by a Chinese person, why does the US government deserve a cut of that?

    R&D, Marketing come to mind.
  • Reply 13 of 99
    robbyxrobbyx Posts: 479member
    e1618978 wrote: »

    A French person buys an iPod made by a Chinese person, why does the US government deserve a cut of that?

    Because the US government is a big greedy inefficient beast with an insatiable appetite. They *deserve* a cut of everything!
  • Reply 14 of 99
    robbyxrobbyx Posts: 479member
    isteelers wrote: »
    One interesting thing to watch would be Amazon's performance once sales taxes are applied throughout the states. A lot of people complain about Apple's tax strategy but those same people I bet buy online and pay no sales tax in the U.S. nor do they declare it on their taxes. It probably won't kill their business because of the convenience and other factors, but it could make going to a closer retail store to get those items at the same price and faster a more attractive proposition for items readily available.

    Great point. How many people on here whining about Apple not paying taxes shop online to avoid sales tax? Despite the fact that, by law, we're all required to declare those purchases and pay that tax to our respective states. That's outright tax dodging compared to what Apple is doing, which is perfectly legal. Yet lets tar and feather all those big evil corporations!
  • Reply 15 of 99
    jragostajragosta Posts: 10,473member
    don108 wrote: »
    By "costly" to Apple what you actually mean is "paying their fair share of taxes instead of hiding profits offshore."

    If they can't use the money because they'd have to pay some of it in taxes, they have $137 billion doing nothing and going to waste. If they bring it back to the U.S. they'll have over $100 billion that can be used.

    Which would you prefer, a bunch of money you can't touch, can't do anything with, and is doing nothing for you, or tons of money that can be used?

    You're the poster child for people who have no concept of how global businesses work.

    Apple pays its fair share of taxes everywhere in the world, if by 'fair', you mean "the amount that the various governments require them to pay." There has never been any accusation that Apple is paying less than required by law (other than, perhaps, a minor technical glitch in their filing, but I'm aware of any). They pay every penny that the various governments require them to pay.

    Now, in the course of operating their business, they generate profits and cash in countries around the world. They can do several things with that money:
    1. Leave it where it is and pay the local taxes where necessary.
    2. Bring it back to the US - which means that they pay a great deal of additional tax
    3. Invest it in something in the country where the money is located.

    Now, if they have $1 B in cash in China and plan to expand in China in the future and buy products in China, why in the world would they pay the taxes to bring that money back to the US, only to send it back to China? It makes sense to keep money in the places where it will be used. And, for the large part, Apple's future growth will be coming from outside the US, so repatriating the money would be silly. If they want to do that some time, they can do it when needed - and pay the taxes then. Repatriating it now serves no useful purpose.

    Let's say that Apple doesn't know where the money will be spent (which is almost certainly the case). In that scenario, they have two choices:
    1. Bring it back to the US now and pay taxes - even though they might need to send it back overseas at some point, so the taxes would be largely wasted
    2. Leave it where it is until it is needed - and then bring it back and pay taxes at that point.

    Obviously, #2 makes far more sense.

    All the people whining about Apple not bringing the money back to the US are missing the entire point. For Apple to bring the money back to the US, there needs to be a reason for them to require the money here. Give them an incentive to build new facilities. Build factories. Begin production in the US. Oh, but wait - as soon as a municipality does that, people are screaming and yelling that it's not fair and Apple is evading taxes because some city gives them a reduction in state and local taxes.

    No matter what Apple does, they can't win the PR game, so they need to continue to do what makes sense from a business perspective. If you want that money to come back to the US, lobby your legislators to do the things that are necessary for the US to be competitive in manufacturing again.
  • Reply 16 of 99
    jragostajragosta Posts: 10,473member
    robbyx wrote: »
    Great point. How many people on here whining about Apple not paying taxes shop online to avoid sales tax? Despite the fact that, by law, we're all required to declare those purchases and pay that tax to our respective states. That's outright tax dodging compared to what Apple is doing, which is perfectly legal. Yet lets tar and feather all those big evil corporations!

    Exactly. And, if they're so eager for tax justice, they should be lobbying the government to require all online purchases to be taxed. Of course, that would remove any shred of a hope of Amazon ever making a profit, but that's too bad.
  • Reply 17 of 99
    froodfrood Posts: 771member

    Quote:

    Originally Posted by e1618978 View Post




    A French person buys an iPod made by a Chinese person, why does the US government deserve a cut of that?



     


     


    Quote:

    Originally Posted by PhilBoogie View Post





    R&D, Marketing come to mind.


     


    Even more so than R&D and marketing- Apple doesn't make a whole lot of money in France.  They also make next to nothing in 'profits' in the US.


     


    Apple's Irish subsidiary has China build iPhones for them for $250.  Apple Ireland sells these to their Dutch subsidiary with 'IP rights' for $650.  The Dutch subsidiary sells it back to the Irish subsidiary for $650.  The Irish subsidiary deposits the profit in a Bank in the Bahamas.  Apple's Irish subsidiary then sells the phone to the US Apple for $650.  Apple US then sells it in their stores to US customers for $650.  Since they paid $650 for it they made $0 in profit in the US.


     


    Reality:


    The transactions are all on paper.  Apple HQ in the US drives design and orders.  The phones ship straight from China to the US.  The phones are sold in the US by hard working people who generated the wealth to buy the phones in the US.  As soon as they buy the phone, the wealth they spent to purchase it is gone from the US economy, no taxes paid.  Blech.


     


    So the problem the e16 posted isn't right.  The problem isn't that Apple isn't paying taxes on phones they sell in France.  The problem is they aren't paying taxes on the phones that are sold in the US- which by and far are the majority of their profits.


     


    Apple paid a total rate of 2.3% in taxes.  Apple isn't evil, they are simply maximizing profits.  As stated most every large multinational does it.  Many pay $0 and billions in profits.  The 'perfect loophole' of allowing the money back into the US is a tempting carrot, but disastrous in practice since now every corporation has a 0% effective tax rate by simply offshoring all profits then repatriating them for free.


     


    The problem isn't Apple.  Its our laws and how ineffective they are.  'Lowering the corporate tax rate' is a common buzz phrase, but it is really just an excuse to lower the taxes on wealthy individuals.  No actual corporation pays anything close to the corporate tax rate.  A better fix would be no corporate tax rate (or possibly even personal tax rate)- just have a higher sales tax rate.  Items would be taxed at the point of purchase.  Savers would be rewarded.  Consumers would pay according to how much they consume.  Anything sold by wealth created in the US would result in revenues in the US instead of shipping the money offshore.


    Economists can come up with a much better plan I'm sure :p

  • Reply 18 of 99
    robbyxrobbyx Posts: 479member
    jragosta wrote: »
    No matter what Apple does, they can't win the PR game, so they need to continue to do what makes sense from a business perspective. If you want that money to come back to the US, lobby your legislators to do the things that are necessary for the US to be competitive in manufacturing again.

    Sadly I don't see that ever happening. We've become way too much of an entitlement culture to ever be competitive again.
  • Reply 19 of 99

    Quote:

    Originally Posted by jragosta View Post




    Quote:

    Originally Posted by robbyx View Post



    Great point. How many people on here whining about Apple not paying taxes shop online to avoid sales tax? Despite the fact that, by law, we're all required to declare those purchases and pay that tax to our respective states. That's outright tax dodging compared to what Apple is doing, which is perfectly legal. Yet lets tar and feather all those big evil corporations!




    Exactly. And, if they're so eager for tax justice, they should be lobbying the government to require all online purchases to be taxed. Of course, that would remove any shred of a hope of Amazon ever making a profit, but that's too bad.


     


    While I'm not like the lefty trolls on these boards screaming for Apple to "pay their fair share" (a disgusting political soundbite that makes anyone that parrots it seem like they let others think for them), I am a liberal, and I do believe that Amazon was exploiting a hole in federal/state/local tax code as a business model for profit. They could undercut any B&M business and they did. I truly believe they had a hand in bringing down many physical businesses, at least indirectly. It's hard or near impossible to compete with a business that doesn't have to charge sales tax. Finally some states are filling that hole in their tax codes and I applaud them for it. It puts all businesses, online or otherwise, on a more level playing field.


     


    That said, did I purchase things on Amazon? Absolutely. It wasn't illegal and it's a human characteristic to take advantage of a situation when it presents itself. Amazon wasn't evil for exploiting the tax hole. I wasn't evil for exploiting the lower prices that tax hole created. And the governments aren't evil for filling that hole to make B&M businesses more competitive with online businesses. Will I end up paying more in taxes? Yes, but that's the price you pay for living in a relatively safe, stable, and equal society. And I will pay gladly.


     


    If Amazon can't make a profit after the law changes, their business wasn't very good in the first place.

  • Reply 20 of 99

    Quote:

    Originally Posted by jragosta View Post





    Exactly. And, if they're so eager for tax justice, they should be lobbying the government to require all online purchases to be taxed. Of course, that would remove any shred of a hope of Amazon ever making a profit, but that's too bad.


    All online purchase should be taxed and eventually they will.  Just wait, it's already started on Amazon in several states and it will eventually go nationwide.

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