Trump-proposed corporate tax reform predicted to have minor positive impact on Apple EPS

Posted:
in AAPL Investors
Given current speculation on tax reform in the U.S., analysts predict that with all other factors unchanged Apple will see a negative impact on its cash hoard because of a repatriation tax, and an increase on taxes paid to import manufactured goods from China, but an overall slight uptick on earnings per share as a result of all factors.




The biggest impact to Apple from proposed tax reform would likely be taxation on imported goods. The proposal as it stands suggests no deduction for imported goods such as the iPhone, and no taxes paid on exported goods.

Apple's product line, including the iPhone, is manufactured overseas, and will be subject to the removal of the deduction. Analytical firm UBS predicts that just based on this, the company will take a $0.22 hit on earnings per share.

For a grossly simplified example of the tax reform on manufactured goods, assuming Apple has one phone priced at $700, the taxable income on the phone in the US is $280 because of production cost deductions and other factors generating $98 in tax for the U.S. at present rates.

Apple's expected overall tax rate is expected to fall to 20% versus the current 35% as a result of the "blueprint."

So, after reform, If the phone were manufactured in the US, the taxable income remains the same at $280, but the lower effective tax rate drops the owed taxes to $56. If the iPhone continues to be manufactured in China, the entire $700 is taxable, but at the lower 20%, ending up in an effective tax on the phone of $140.




Regardless of the source of the cost increase, be it the expense of moving manufacture of the iPhone to the U.S. or keeping production overseas, any cost increase would likely be applied to consumers.

Impacts from overseas cash

A proposed repatriation tax of 8.75 percent will cause a slight hit on cash on hand on the books.

However, the positive impact on earnings per share based on deferred tax liability on the overseas cash no longer making as much of an impact on Apple's earnings is expected to drive Apple's earnings per share up, offsetting the complex import tax situation.

Other considerations impacting Apple

Wholesale tax changes will have a much larger financial impact outside of Apple globally, which will reverberate back to the company. It is unclear what the wide application of what is effectively a higher tax rate to the U.S. on imported goods will have globally, which will alter the dollar's exchange rate, and the currency exchange headwinds that Apple frequently talks about during quarterly earnings calls.

Additionally, under the proposal, Apple would be able to deduct U.S. investments in part more than the current code allows, such as the Apple Campus currently under construction. Also deductible will be the cost of building-out Apple-owned construction facilities, should it choose to do so.

The tax reform proposal, entitled "A Better Way" was published at the height of the election process on June 24, 2016. It promises simplification of the tax code, and a broadening of the taxable base, alongside a reduction in effective tax rates overall.

No bill has been written, nor proposed at this time. Specific figures and any benefits spelled out by the plan are expected to change.

China has threatened that a trade war against the country will result in more harm to the U.S., with a state-run paper threatening that the government will take "countermeasures" against Apple and the automotive industry if an economic conflict comes to pass.

Comments

  • Reply 1 of 14
    You know that not all life and business is about Apple, right? Good!
  • Reply 2 of 14
    Not everybody will agree with this, but I would love to see repatriation with a massive buyback. With the last repatriation tax holiday, there was a restriction on buybacks, but the next administration may not be sticklers for that kind of thing in the same way. A big buyback would allow Apple to raise the dividend significantly without any impact on the total payout amount, and they could probably afford to double the dividend and still easily generate more cash than they pay out. It would also help close the huge gap between their P/E and the ex-cash P/E, which I think has been contributing to the stock's ongoing undervaluation. If they could buy back a third of their shares (which they could almost do at this point), it would take the P/E below 10, so the the share price would have to more than triple to reach a valuation comparable to that of MSFT or GOOG, which are both around 30 (and neither of which pays a dividend that is twice that of Apple's current payout). 

    I know it's kind of a dream to hope for something so "rational" to happen, given the history, but it sure would be nice.

    edited January 2017
  • Reply 3 of 14
    2oh12oh1 Posts: 501member
    I bet it'll make him richer though, and that's all he cares about.  He cares about his riches and his ego.
    Soli
  • Reply 4 of 14
    You know that not all life and business is about Apple, right? Good!
    ? If you want to see articles about things other than Apple, try a different site.
    SoliStrangeDays
  • Reply 5 of 14
    Not everybody will agree with this, but I would love to see repatriation with a massive buyback. With the last repatriation tax holiday, there was a restriction on buybacks, but the next administration may not be sticklers for that kind of thing in the same way. A big buyback would allow Apple to raise the dividend significantly without any impact on the total payout amount, and they could probably afford to double the dividend and still easily generate more cash than they pay out. It would also help close the huge gap between their P/E and the ex-cash P/E, which I think has been contributing to the stock's ongoing undervaluation. If they could buy back a third of their shares (which they could almost do at this point), it would take the P/E below 10, so the the share price would have to more than triple to reach a valuation comparable to that of MSFT or GOOG, which are both around 30 (and neither of which pays a dividend that is twice that of Apple's current payout). 

    I know it's kind of a dream to hope for something so "rational" to happen, given the history, but it sure would be nice.

    I agree with this. It will lower Apple's market cap by $150+ billion, but that is quite irrelevant.

    Apple's ex-cash forward PE is 10.6x (and it's only ~12x with cash included). The market will more clearly see what a ludicrously poorly-valued asset it is.
    Soli
  • Reply 6 of 14
    Okay can someone explain this article to me? The article eludes to a deduction (which is the COGS) would now be taxable at the corporate tax rate of 20%, but to me this is not correct. The COGS are still a deduction since the federal tax is on the corporate profit no matter where the goods are manufactured. I thought what would happen is an import tax on all products imported into the US for sale, which would mean tax on ~40% of revenues (US sales % according to Apple's 10-K). Since we don't no what the import duty would be on these US sold goods I am not sure how the EPS impact is being calculated.
  • Reply 7 of 14
    gtrgtr Posts: 3,231member
    2oh1 said:
    I bet it'll make him richer though, and that's all he cares about.  He cares about his riches and his ego.
    Yep.

    That's why he rejected his Presidential salary and accepted to be paid only a dollar, just like that greedy Jobs character when he returned to save Apple.
    awilliams87potatoleeksoup
  • Reply 8 of 14
    Not everybody will agree with this, but I would love to see repatriation with a massive buyback. With the last repatriation tax holiday, there was a restriction on buybacks, but the next administration may not be sticklers for that kind of thing in the same way. A big buyback would allow Apple to raise the dividend significantly without any impact on the total payout amount, and they could probably afford to double the dividend and still easily generate more cash than they pay out. It would also help close the huge gap between their P/E and the ex-cash P/E, which I think has been contributing to the stock's ongoing undervaluation. If they could buy back a third of their shares (which they could almost do at this point), it would take the P/E below 10, so the the share price would have to more than triple to reach a valuation comparable to that of MSFT or GOOG, which are both around 30 (and neither of which pays a dividend that is twice that of Apple's current payout). 

    I know it's kind of a dream to hope for something so "rational" to happen, given the history, but it sure would be nice.

    If Apple brought the money held overseas (i.e. the retained earnings of foreign subsidiaries) to the U.S., it could perhaps buy back a significant amount of shares in addition to what it currently plans to. But I don't think it could buy back a third of its outstanding shares, at least not without creating an ugly balance sheet where its liabilities exceeded its assets. And I don't think Apple would seriously consider doing the latter.

    Under its current capital return program, Apple already plans to buy back an additional $40 billion or so of its own stock. That's as of its last reporting period, September 2016. Over the last 4 years it's bought back over $130 billion of its own shares, reducing its outstanding shares (net of new issuances, e.g. for share-based compensation) by about 1.2 billion to about 5.3 billion. But it's done that in part by borrowing money. It's taken on about $80 billion worth of term debt over the last 4 years. That's not a problem because that (and other) debt is easily offset by the cash that Apple effectively holds abroad. Apple has basically been indirectly using that cash to help (along with domestic cash available) pay for its capital return program by, in effect, borrowing against it. (That's not to say that Apple wouldn't have been able to borrow large amounts of money even if it didn't hold all of that cash; its credit worthiness would likely still be regarded as very good even without it holding all that cash.)

    Anyway, there's a lot more going on with Apple's balance sheet. But suffice it to say (I hope) that if it spent all of that cash currently held abroad on a share repurchase program, its liabilities would exceed its assets by a meaningful amount. As it is, Apple reports assets in excess of liabilities of about $130 billion. (Again, there's quite a bit more going on underneath that net than just its cash held abroad and the term debt I mentioned.) So I doubt it would want to spend most of the cash that would be freed up by a massive 'repatriation.'

    I would say that the ability to bring its foreign-held cash to the U.S. at a relatively low tax rate, such as the 8.75% mentioned in the OP, would improve Apple's balance sheet somewhat. But not enough that it would be likely to spend a huge portion of that newly freed up cash on a buyback program. As it is, Apple has provided for about $31 billion worth of 'repatriation' taxes. So that amount functions as a liability on its balance sheet. That would be the amount owed, based on the current 35% rate, on about half of the $216 billion currently held by foreign subsidiaries. Apple hasn't provided for 'repatriation' taxes on the other half because it is intended to be indefinitely reinvested in foreign operations. That of course could change based on changes in U.S. tax policy. Even if Apple brought meaningfully all of that $216 billion to the U.S. (i.e. to the parent company) all at once and paid an 8.75% tax on it, the tax liability ($19 billion or so) would be less than what Apple has already planned (for accounting purposes) on having to pay on half of it. Apple's cash holdings would be reduced by $19 billion or so, but that $31 billion in deferred tax liability would also disappear. Apple would end up with a one time credit of more than $10 billion.

    edited January 2017 gatorguysteyounpotatoleeksoupjSnively
  • Reply 9 of 14

    steyoun said:
    Okay can someone explain this article to me? The article eludes to a deduction (which is the COGS) would now be taxable at the corporate tax rate of 20%, but to me this is not correct. The COGS are still a deduction since the federal tax is on the corporate profit no matter where the goods are manufactured. I thought what would happen is an import tax on all products imported into the US for sale, which would mean tax on ~40% of revenues (US sales % according to Apple's 10-K). Since we don't no what the import duty would be on these US sold goods I am not sure how the EPS impact is being calculated.
    The proposal referred to in the OP is one that would fundamentally change the way (federal) business taxes were determined in the U.S. (for both corporate and many non-corporate entities). The bases on which taxes would be paid would change. For some businesses the changes wouldn't, in the end, be substantive - other than perhaps a reduced rate. For others - such as those where large portions of their cost of goods is incurred outside of the U.S. - the changes would be quite substantive.

    So... although the way that taxes due would be determined would be changed, in effect the deduction that you're referring to (for foreign-incurred COGS) would be lost. We wouldn't really just be taxing profit anymore.
    gatorguysteyoun
  • Reply 10 of 14
    gtr said:
    2oh1 said:
    I bet it'll make him richer though, and that's all he cares about.  He cares about his riches and his ego.
    Yep.

    That's why he rejected his Presidential salary and accepted to be paid only a dollar, just like that greedy Jobs character when he returned to save Apple.
    Oh boy. What "saving" does this country need? On which planet?

    I sincerely have no interest in making this political, but you guys on both sides of debate/debacle and your respective hyperbole is just plain crap. Take it outside. Thanks.
    ben20
  • Reply 11 of 14
    gatorguygatorguy Posts: 20,009member
    carnegie said:
    Not everybody will agree with this, but I would love to see repatriation with a massive buyback. With the last repatriation tax holiday, there was a restriction on buybacks, but the next administration may not be sticklers for that kind of thing in the same way. A big buyback would allow Apple to raise the dividend significantly without any impact on the total payout amount, and they could probably afford to double the dividend and still easily generate more cash than they pay out. It would also help close the huge gap between their P/E and the ex-cash P/E, which I think has been contributing to the stock's ongoing undervaluation. If they could buy back a third of their shares (which they could almost do at this point), it would take the P/E below 10, so the the share price would have to more than triple to reach a valuation comparable to that of MSFT or GOOG, which are both around 30 (and neither of which pays a dividend that is twice that of Apple's current payout). 

    I know it's kind of a dream to hope for something so "rational" to happen, given the history, but it sure would be nice.

    If Apple brought the money held overseas (i.e. the retained earnings of foreign subsidiaries) to the U.S., it could perhaps buy back a significant amount of shares in addition to what it currently plans to. But I don't think it could buy back a third of its outstanding shares, at least not without creating an ugly balance sheet where its liabilities exceeded its assets. And I don't think Apple would seriously consider doing the latter.

    Under its current capital return program, Apple already plans to buyback a little more than $40 billion of its own stock. That's as of its last reporting period, September 2016. Over the last 4 years it's bought back over $130 billion of its own shares, reducing its outstanding shares (net or new issuances, e.g. for share-based compensation) by about 1.2 billion to about 5.3 billion. But it's done that in part by borrowing money. It's taken on about $80 billion worth of term debt over the last 4 years. That's not a problem because that (and other) debt is easily offset by the cash that Apple effectively holds abroad. Apple has basically been indirectly using that cash to help (along with domestic cash available) pay for its capital return program by, in effect, borrowing against it. (That's not to say that Apple wouldn't have been able to borrow large amounts of money even if it didn't hold all of that cash; its credit worthiness would likely still be regarded as very good even without it holding all that cash.)

    Anyway, there's a lot more going on with Apple's balance sheet. But suffice it to say (I hope) that if it spent all of that cash currently held abroad on a share repurchase program, its liabilities would exceed its assets by a meaningful amount. As it is, Apple reports assets in excess of liabilities of about $130 billion. (Again, there's quite a bit more going on underneath that net than just its cash held abroad and the term debt I mentioned.) So I doubt it would want to spend most of the cash that would be freed up by a massive 'repatriation.'

    I would say that the ability to bring its foreign-held cash to the U.S. at a relatively low tax rate, such as the 8.75% mentioned in the OP, would improve Apple's balance sheet somewhat. But not enough that it would be likely to spend a huge portion of that newly freed up cash on a buyback program. As it is, Apple has provided for about $31 billion worth of 'repatriation' taxes. So that amount functions as a liability on its balance sheet. That would be the amount owed, based on the current 35% rate, on about half of the $216 billion currently held by foreign subsidiaries. Apple hasn't provided for 'repatriation' taxes on the other half because it is intended to be indefinitely reinvested in foreign operations. That of course could change based on changes in U.S. tax policy. Even if Apple brought meaningfully all of that $216 billion to the U.S. (i.e. to the parent company) all at once and paid an 8.75% tax on it, the tax liability ($19 billion or so) would be less than what Apple has already planned (for accounting purposes) on having to pay on half of it. Apple's cash holdings would be reduced by $19 billion or so, but that $31 billion in deferred tax liability would also disappear. Apple would end up with a one time credit of more than $10 billion.

    Nicely explained. Thanks for the time you put into it. 
    potatoleeksoup
  • Reply 12 of 14
    gatorguy said:
    carnegie said:
    Not everybody will agree with this, but I would love to see repatriation with a massive buyback. With the last repatriation tax holiday, there was a restriction on buybacks, but the next administration may not be sticklers for that kind of thing in the same way. A big buyback would allow Apple to raise the dividend significantly without any impact on the total payout amount, and they could probably afford to double the dividend and still easily generate more cash than they pay out. It would also help close the huge gap between their P/E and the ex-cash P/E, which I think has been contributing to the stock's ongoing undervaluation. If they could buy back a third of their shares (which they could almost do at this point), it would take the P/E below 10, so the the share price would have to more than triple to reach a valuation comparable to that of MSFT or GOOG, which are both around 30 (and neither of which pays a dividend that is twice that of Apple's current payout). 

    I know it's kind of a dream to hope for something so "rational" to happen, given the history, but it sure would be nice.

    If Apple brought the money held overseas (i.e. the retained earnings of foreign subsidiaries) to the U.S., it could perhaps buy back a significant amount of shares in addition to what it currently plans to. But I don't think it could buy back a third of its outstanding shares, at least not without creating an ugly balance sheet where its liabilities exceeded its assets. And I don't think Apple would seriously consider doing the latter.

    Under its current capital return program, Apple already plans to buyback a little more than $40 billion of its own stock. That's as of its last reporting period, September 2016. Over the last 4 years it's bought back over $130 billion of its own shares, reducing its outstanding shares (net or new issuances, e.g. for share-based compensation) by about 1.2 billion to about 5.3 billion. But it's done that in part by borrowing money. It's taken on about $80 billion worth of term debt over the last 4 years. That's not a problem because that (and other) debt is easily offset by the cash that Apple effectively holds abroad. Apple has basically been indirectly using that cash to help (along with domestic cash available) pay for its capital return program by, in effect, borrowing against it. (That's not to say that Apple wouldn't have been able to borrow large amounts of money even if it didn't hold all of that cash; its credit worthiness would likely still be regarded as very good even without it holding all that cash.)

    Anyway, there's a lot more going on with Apple's balance sheet. But suffice it to say (I hope) that if it spent all of that cash currently held abroad on a share repurchase program, its liabilities would exceed its assets by a meaningful amount. As it is, Apple reports assets in excess of liabilities of about $130 billion. (Again, there's quite a bit more going on underneath that net than just its cash held abroad and the term debt I mentioned.) So I doubt it would want to spend most of the cash that would be freed up by a massive 'repatriation.'

    I would say that the ability to bring its foreign-held cash to the U.S. at a relatively low tax rate, such as the 8.75% mentioned in the OP, would improve Apple's balance sheet somewhat. But not enough that it would be likely to spend a huge portion of that newly freed up cash on a buyback program. As it is, Apple has provided for about $31 billion worth of 'repatriation' taxes. So that amount functions as a liability on its balance sheet. That would be the amount owed, based on the current 35% rate, on about half of the $216 billion currently held by foreign subsidiaries. Apple hasn't provided for 'repatriation' taxes on the other half because it is intended to be indefinitely reinvested in foreign operations. That of course could change based on changes in U.S. tax policy. Even if Apple brought meaningfully all of that $216 billion to the U.S. (i.e. to the parent company) all at once and paid an 8.75% tax on it, the tax liability ($19 billion or so) would be less than what Apple has already planned (for accounting purposes) on having to pay on half of it. Apple's cash holdings would be reduced by $19 billion or so, but that $31 billion in deferred tax liability would also disappear. Apple would end up with a one time credit of more than $10 billion.

    Nicely explained. Thanks for the time you put into it. 
    You're welcome.
  • Reply 13 of 14
    irnchrizirnchriz Posts: 1,580member
    If they don't bring the cash back to the USA but use it to pay for the manufacturing costs then they won't be hit by a repatriation tax, only any tariff in importing from china, which they can add onto the devices and label it as the trump tax.  Then joe public will know why they will be paying more.
  • Reply 14 of 14
    gtrgtr Posts: 3,231member
    gtr said:
    2oh1 said:
    I bet it'll make him richer though, and that's all he cares about.  He cares about his riches and his ego.
    Yep.

    That's why he rejected his Presidential salary and accepted to be paid only a dollar, just like that greedy Jobs character when he returned to save Apple.
    Oh boy. What "saving" does this country need? On which planet?

    I sincerely have no interest in making this political, but you guys on both sides of debate/debacle and your respective hyperbole is just plain crap. Take it outside. Thanks.
    A public forum IS outside.

    You don't like it? Ignore it and move on with your life.
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