In the years following the Great Recession Apple and many other companies were borrowing money (at super cheap rates) in order to funnel it out to shareholders as stock buybacks and dividends --which is obviously not a sustainable business model. But it kept the stock market in a 10 year bull market -- the largest period of sustained growth in its history (Well, actually, the 2nd longest).
But, now that the Fed is raising rates, that mechanism is no longer viable. So, rather than letting the stock market crash to its fundamental value, they thought up a new ponzi scheme: The federal government borrows the money, funnels the proceeds to corporations and the corporations funnel it out to their stock holders via share buybacks and dividends. Essentially, the U.S. government borrows the money from China and gives it to stock holders...
Like all scams, it's a brilliant scheme that works really, really well. Until it doesn't.
Apple borrowed Bonds against the value of itself, effectively its cash overseas. So it paid extremely low interest for flexibility to avoid paying very high tax penalties. It can now hold that debt and spend its cash pile, and pay off its debt from earnings (or cash, but it can probably invest its cash with a far better return!)
Rates are rising, but Apple no longer needs to issue debt.
How do you think the fed govt "funneling money to corporations"? Apple is distributing its earnings to shareholders. Apple also holds billions in US Govt securities.
The federal government cut corporate taxes -- which they will have to borrow money to pay for. Most of that borrowed money is not being invested. It is being distributed to share holders as dividends and stock buy backs.
Thanks DED for the spirited defense of the buybacks! I find it funny that the haters disparage the buybacks. It is up their with notch-hate, macpro-hate, no-headphone-jack-hate, siri-hate and my all time favorite home-pod-hate which generates even more controversy than a trump tweet.
The buybacks at current elevated stock levels make less sense than ever. Apple should continue to provide value to investors by growing the company. A buyback amounts to an accounting trick. And I’m thankful that the current administration, not the previous one, had the wisdom to make repatriating overseas funds a reality.
Let's try this one more time for you.
- Corporations are "owned" by the shareholders. They are not owned by the US gov't, nor (generally) by whiny people on Internet forums, analysts, or the tech media. - When a company makes more cash than their business needs (accounting for R&D, growth, new products, M&A, etc), then that is "free cash flow". The question is what to do with this. A company could look at taking on more organic growth (increasing R&D in order to deliver new products), purchase other companies to grow business, or return the cash to the owners of the company - the shareholders. - Having too much excess cash on the balance sheet (e.g. just keeping it) is considered a liability for a company (could be wasted in future by SpamSandwich and thus its future value is less than present).
What is unique about Apple is that they are generating SO MUCH FREE CASH, that they cannot use it all in while "PRUDENTLY / EFFICIENTLY" running their business. Apple's whole corporate DNA is about focusing on a few "great ideas". You can only spend so much on those. It takes time, not just money, to bring new products to market. Just starting a whole bunch of side projects "because we have the money" is how companies lose focus and destroy their long term value.
So Apple has given back to the shareholders - over $275B USD in the last 6 years it would seem. If Apple had not done this, their net cash balance would be over $400B, just sitting on the books. Let it grow too large, and some hedge fund could (try anyways) to raise money to buy out Apple, since with so much cash it would help with the debt load to buy them, and the cash is not reflected well in the share price. Then said hedge fund would milk the company for all it was worth and that would be it.
While share buybacks at most other companies has been considered controversial, as it is perceived as a means to "goose" the share price in the short term (while siphoning off from investment in business, or accruing large debt), that is not why Apple is doing it. It is the most efficient means for them to return the cash to the shareholders by having each remaining share (those who don't want to sell) have a larger ownership stake in the company.
Good story!
The truth is: The stock buybacks began several years back when Carl Icahn raised enough fuss as an activist shareholder to force it. At that point, Apple had to borrow the money in order to pay it out to the shareholders. But, with interest rates near zero that wasn't a big deal.
Now interest rates are rising which makes that strategy far less appealing. So, the federal government borrowed money (or will borrow it) to issue tax cuts -- which Apple is now distributing to its stock holders. So, eventually the American people will have to pay the debt that Apple is distributing....
That is a totally distorted view of is actually happening.
Apple was
sitting on over $200B in cash in overseas accounts because they didn't
want to pay the current (at the time) tax rate in order to bring money that they don't need, into the US. Money that Apple don't need in
the US because their US operation generated enough revenue and profits. Money that Apple had no problem leaving overseas, untaxed by the US. It's been like this for over a decade with Apple...
By lowering the tax
rate for bringing in overseas profits, the Federal government collected
$38B from Apple alone, when Apple decided to bring their overseas profits into the US.
It is not really a choice any longer since the indefinite tax deferral has been done away with under the new corporate tax law if I understand correctly. With that said Apple has not yet "repatriated" all that cash, nor paid the nearly $40B tax bill due on it (unless that rumored loophole allowing 8% instead of 15.5% exists and lets them avoid some of it)
But I'm not sure whether that applies to money that is already sitting in overseas accounts. It may only apply to new profits made, after the tax reform. As I understand it, corporations will now have to pay some taxes on overseas profits, regardless if they keep it overseas, as they can no longer defer all of the taxes on it. I assume that the money Apple have in overseas accounts now, can remain there untouchable by any new tax codes that would tax it, without it being repatriated into the US. That's why a special tax deal was made as an incentive for corporations to repatriate their overseas profits, at a lower tax rate, now.
I don't think the US can all of a sudden change the tax code and start collecting tax on the overseas profits that are in overseas accounts now, even if it's still sitting in an overseas account, as those profits are still subject to the tax code at the time they were made and put into those accounts. That would be like the IRS all sudden changing the tax code and say that the profits made every year in an IRA, will now be subject to a 5% annual tax, even if its still sitting in the account and the tax paid will be credited back to you as you withdraw the money from it. And you now owe a 5% tax on all the profits you're already made in the IRA, over the years you had the account.
The recent tax law changes do apply a tax (of up to 15.5%) on as-yet unremitted foreign earnings, regardless of whether they are actually repatriated (i.e. distributed to the parent domestic corporation). Those prior foreign earnings are deemed repatriated. So the recent tax law changes make something taxable that wasn't taxable before. In a sense, they raised taxes in a particular regard. From most corporations' perspectives, the raising of taxes in that regard was more than made up for by taxes being lowered in other regards.
But, to be clear, a new tax is now applied. Just as an individual taxpayer typically doesn't have to pay income taxes on many kinds of income which a corporation they own (or own part of) makes unless that income is distributed to them, a domestic corporation like Apple previously didn't have to pay U.S. income taxes on many kinds of income which a foreign corporation it owned made unless that income was distributed to it. It now has to when it comes to prior earnings of such foreign corporations, even if those earnings aren't distributed to it.
Going forward such foreign earnings generally aren't taxable (as income) by the U.S., even if they are distributed. There is however a new tax which applies to certain foreign earnings - global intangible low-taxed income (GILTI) - if the foreign income taxes paid on those earnings is low enough.
Just a thought.. Let's say Apple never started it's buybacks and dividends program. How big would it's cash pile be today? Would the company be worth over a trillion dollars?
They have spent about 200 billion on buybacks and dividends. Even with that factored in the company is worth over 800 billion. 800 billion plus the 200 billion spent puts it over 1 trillion dollars yes?
(I get this is all theoretical)
I wonder if you added up all the profits the company has seen since 1977 (minus the years of losses) how much total the company has brought in since it's inception 41 years ago.
On that note, I wonder also if you added up all the profitable companies over the last 100 years, who (adjusted for inflation) is the most profitable company in history. Would it still be Apple?
Just a thought.. Let's say Apple never started it's buybacks and dividends program. How big would it's cash pile be today? Would the company be worth over a trillion dollars?
They have spent about 200 billion on buybacks and dividends. Even with that factored in the company is worth over 800 billion. 800 billion plus the 200 billion spent puts it over 1 trillion dollars yes?
(I get this is all theoretical)
I wonder if you added up all the profits the company has seen since 1977 (minus the years of losses) how much total the company has brought in since it's inception 41 years ago.
To your last query: Apple has made about $365 billion in total net income over the last 40 or so years. About 90% of that has been made over the last 7-1/2 years, and about 99% of it has been made over the last 15 years.
I won't try to answer your hypothetical value query for now, that would (for me at least) require a longer discussion. But Apple has now returned over $275 billion to shareholders over the last 6 or so years through dividends (and dividend equivalents), stock buybacks, and net share settlement.
On that note, I wonder also if you added up all the profitable companies over the last 100 years, who (adjusted for inflation) is the most profitable company in history. Would it still be Apple?
I had always read it was the Dutch East India Company. By quite a bit.
Edit: oops. You said in the last 100 years. I don't know if a company like Standard Oil might have been more profitable or not. I think Aramco is said to be more profitable today than Apple. There is not very many companies who have experienced the wealth of Apple though
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But, to be clear, a new tax is now applied. Just as an individual taxpayer typically doesn't have to pay income taxes on many kinds of income which a corporation they own (or own part of) makes unless that income is distributed to them, a domestic corporation like Apple previously didn't have to pay U.S. income taxes on many kinds of income which a foreign corporation it owned made unless that income was distributed to it. It now has to when it comes to prior earnings of such foreign corporations, even if those earnings aren't distributed to it.
Going forward such foreign earnings generally aren't taxable (as income) by the U.S., even if they are distributed. There is however a new tax which applies to certain foreign earnings - global intangible low-taxed income (GILTI) - if the foreign income taxes paid on those earnings is low enough.
They have spent about 200 billion on buybacks and dividends. Even with that factored in the company is worth over 800 billion. 800 billion plus the 200 billion spent puts it over 1 trillion dollars yes?
(I get this is all theoretical)
I wonder if you added up all the profits the company has seen since 1977 (minus the years of losses) how much total the company has brought in since it's inception 41 years ago.
I won't try to answer your hypothetical value query for now, that would (for me at least) require a longer discussion. But Apple has now returned over $275 billion to shareholders over the last 6 or so years through dividends (and dividend equivalents), stock buybacks, and net share settlement.
Edit: oops. You said in the last 100 years. I don't know if a company like Standard Oil might have been more profitable or not. I think Aramco is said to be more profitable today than Apple. There is not very many companies who have experienced the wealth of Apple though