Analysts say shareholders could win big from Apple's overseas cash repatriation

Posted:
in AAPL Investors
Apple's plan to repatriate the majority of its overseas cash holdings to the United States will majorly benefit its shareholders, analysts claim, with the company expected to use part of the cash influx to increase its share buyback programs and significantly boost dividend payments.




Speculating on what Apple will do with most of the $252.3 billion in cash it holds overseas that it will bring to the U.S. following changes in the U.S. tax code, analysts told the Wall Street Journal to expect a boost to Apple's bottom line through the cut to its effective tax rate, as well as an acceleration in share buybacks. Some also hope the spare cash will also increase Apple's research and development spending and to increase its rate of acquisitions.

Shareholders stand to benefit considerably, based comments made by Apple finance chief Luca Maestri last year suggesting repatriating cash would provide more flexibility in returning money to shareholders, though with little in the way of plans provided since. Apple already repurchases shares and have provided dividends to its shareholders, reportedly spending $234 billion on its efforts since fiscal 2012, though last year it announced ambitions for that total to reach $300 billion by March 2019.

According to venture capital firm Loup Ventures, it expects Apple to announce an increase in buybacks and dividends worth between $125 billion and $150 billion through to 2020, bringing the total spend up to as much as $450 billion. The firm puts $88 billion of the increase down to changes to the tax system, with $71 billion towards buybacks, $12 billion for a one-time special dividend, and a $5 billion increase to dividends for two years.

Loup Ventures managing partner Gene Munster suggests "I think they have struck the right balance between the fat cats and the everyday person" on the figures. While investors will benefit from the aforementioned $88 billion, Apple has also announced plans to contribute around $75 billion into the U.S. economy through investments in manufacturing, capital expenditures, and a $38 billion tax commitment.

Munster also notes Apple has other ways it can spend its cash haul, suggesting it could use it to pay off the $116 billion debit it has, which has been used to fund existing share buyback efforts. Apple could also decide to do nothing, and hold onto as much of its cash as possible.

Shareholders will also benefit from the lower effective tax rate, granted through the changes to the tax code. According to University of Pennsylvania's Wharton School accounting professor Jennifer Blouin, Apple reported an effective tax rate of 25 percent for the previous three years, and estimates the current rate is close to 18 percent, consisting of 42 percent for combined federal and state taxes on U.S. profits for a third of the figure, and 6 percent on overseas profits for two thirds.

Blouin expects the effective tax rate to reduce to around 16 percent, with the declining U.S. tax rate offsetting new higher taxes on some foreign profits.

Some investors told the report they expected Apple to use some of the cash to avoid becoming too reliant on iPhone-derived revenue, with the smartphone providing approximately two thirds of sales for the company. Part of this could be through increased research and development spending, which rose to $11.58 billion last year, and though this is on a par with its other technology rivals, Apple's spending is at a proportionally lower rate when taking revenue into account.

The shift in reliance from the iPhone could also be performed via an increase in acquisitions. While there are many large potential acquisition targets that could be bought with the cash, such as Netflix, Apple has typically kept itself from such high-value purchases, with the $3 billion spent on Beats an exception to Apple's typical buying habits.

Comments

  • Reply 1 of 10
    Wall Street never seems to be happy with Apple's acquisitions.  Critics are surely never happy with Tim Cook's decisions.  Amazon shareholders are very tolerant of Jeff Bezos' acquisition choices, no matter how much he spends.  Wall Street praises Jeff Bezos for everything he does.  I often wonder if it's just a problem of confidence or Tim Cook really doesn't have a clue on how to create growth for Apple.  Apple spent some measly $3B on Beats and there was such moaning and whining about the purchase.  Microsoft practically threw away about $8B on Nokia and ruined the company and Microsoft shareholders didn't even seem upset.  Now Microsoft leads Apple in growth potential despite a completely failed smartphone platform.  Apple shareholders never seem satisfied.  Apple beats Microsoft in almost every fundamental metric.  I'll bet even if Apple spent some huge amount of money on a company and it didn't pay off immediately, shareholders would be screaming to lynch Tim Cook because he isn't Steve Jobs.

    I think Apple is in a lose-lose situation compared to any of the FANG stocks.  Maybe Apple should stick to R&D, paying down debt and increasing dividends.  Maybe that's the safest way for Apple.  What Apple is currently doing works for most companies in a big way, but Wall Street doesn't seem to appreciate those methods in Apple's case.  It's probably difficult for a $900B market cap company to grow like a startup, but it seems that's what's expected from Apple.  I can't even imagine what sort of product would be better than selling iPhones, but Apple had better find something else quick or Apple's value will sink like a stone.  Apple's services business is the only other thing that has a chance of boosting revenue in the near term.  Why did Apple have to be the only major tech company that didn't start a cloud business?  All the other major tech companies are pulling in revenue and being praised to high heaven by Wall Street.  Apple just had to miss out on easy pickings despite having all those data centers being built.  Also, Apple using AWS is just ridiculous.  Giving Amazon all that revenue to blow past Apple in value in a year makes no sense at all.  So far, that repatriated cash is doing almost nothing for Apple shareholders.  I'll see what happens in six months from now to draw any conclusions on whether Apple knows what's good for shareholders.
    repressthis
  • Reply 2 of 10
    Over the last 5 fiscal years, Apple has returned more capital to shareholders ($231 billion) than it has made in after-tax profits ($224 billion). Its cash net-of-debt has still grown a little over that time (from $121 billion to $153 billion) because net cash flows and net profits aren't the same. They differ for a number of reasons, e.g. amortization and deferred tax accounting. The latter has represented a large part of the difference in Apple's case. But going forward deferred tax accounting shouldn't cause as much of a difference. And Apple has a large tax bill it now has to pay, either out of its cash pile or out of ongoing income.

    So even though Apple's after-tax profits are likely to increase meaningfully as a result of the recent tax law changes, I don't expect Apple to increase the pace at which it returns capital to shareholders dramatically. It will, I assume, continue to expand its capital return program - i.e. the total amount available for that purpose - to more or less keep pace with the after-tax profits it generates. But I don't expect it to expand the program enough to greatly reduce its cash net-of-debt. That cash pile will already, effectively, be reduced a fair bit over time by Apple's new $40-ish billion tax bill - whether we consider that bill being paid out of the cash pile or out of the ongoing cash flow which would otherwise, other things being equal, be going into the cash pile.

    A fairly small special dividend wouldn't shock me, nor would a somewhat larger than normal increase to its regular dividend. It will, after all, likely be making more after-tax profit as a result of the recent tax law changes. But I wouldn't expect a combination of dividend increases and share buyback spending which would reduce its cash net-of-debt below something like $100 billion.
    retrogustogregg thurmanbshank
  • Reply 3 of 10
    linkmanlinkman Posts: 893member
    This is one of the few times analyst speculation will get something correct about Apple.
  • Reply 4 of 10
    #1 I often wonder if it's just a problem of confidence or Tim Cook really doesn't have a clue on how to create growth for Apple.

    #2 It's probably difficult for a $900B market cap company to grow like a startup, but it seems that's what's expected from Apple.

    #3 I can't even imagine what sort of product would be better than selling iPhones, but Apple had better find something else quick or Apple's value will sink like a stone.

    #4 Giving Amazon all that revenue to blow past Apple in value in a year makes no sense at all. 
    #1 Under Cook's leadership Apple's revenue has grown 105%.  The cash value of Apple's annual growth equals that of a Fortune 500 company every year.

    #2 See #1.

    #3. The initiatives Apple has introduced in the last couple years will coalesce into a significant revenue stream that will rival today's iPhone revenue.  Because much of those initiatives are dependent on the iPhone PLATFORM, iPhone sales/revenue will continue to be #1 for a long time.  You can no longer think of the iPhone as a single product.  It is a platform from which other products spring.

    #4 Amazon has never exceeded Apple's market valuation, and isn't likely to approach Apple's increasing market valuation in the foreseeable (7 - 10 years?) future.  Amazon is nothing more than an online big box retailer.  The products it actually manufactures don't materially contribute to its big box ethos, they are meant to increase shopping on Amazon, nothing more.
    randominternetpersonwatto_cobrabshankrepressthis
  • Reply 5 of 10
    carnegie said:
    Over the last 5 fiscal years, Apple has returned more capital to shareholders ($231 billion) 
    A most excellent post, thank you for publishing it.
    watto_cobrabshank
  • Reply 6 of 10
    blastdoorblastdoor Posts: 1,893member
    I’ll guess they don’t buy back bonds. The interest they pay on their debt is pretty low. Massive tax cuts combined with low unemployment has the potential to stoke inflation. Having low interest debt with a rising inflation rate is a good situation to be in. 
  • Reply 7 of 10
    Well, duh.

    Of course they were going to do this. This is not a surprise, shocking or even disappointing. It's what businesses do, just like the new directive for Apple's lawyers (and they're not the only ones) to find the bigger loopholes in this poorly written law for even bigger profits with a new close-to-zero tax rate while the rest of you get to start paying for it in 2019.

    Good times.
  • Reply 8 of 10
    chasmchasm Posts: 1,263member
    Some quick (and possibly inaccurate) math: $12B divided among the 5.2B shares works out to a an entire $2.31 per share. Great for the super-rich and others who hold massive quantities of the stock, but for the small investor this will likely amount to a "free" tank of gas (that the US is mortgaging $1.5T in new debt to provide these companies). While I think it is great that Apple will make proactive investments in the business with the bulk of their tax savings, they are also devoting a fair amount to the same thing all the other companies will primarily do with this free money: executive bonuses, buybacks, special dividends. I don't see that really stimulating or growing the economy, because it has failed to do so each time it has been tried (with "tax holidays" and corporate tax cuts) in the past.
  • Reply 9 of 10
    bshankbshank Posts: 160member
    Well, duh.

    Of course they were going to do this. This is not a surprise, shocking or even disappointing. It's what businesses do, just like the new directive for Apple's lawyers (and they're not the only ones) to find the bigger loopholes in this poorly written law for even bigger profits with a new close-to-zero tax rate while the rest of you get to start paying for it in 2019.

    Good times.
    I’ll be earning money from Apple’s tax reform plan. It is good times
  • Reply 10 of 10
    Wall Street never seems to be happy with Apple's acquisitions. 
    Coming up next, Apple acquires Wall Street... /s
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