Not sure I agree with the urgency angle to this analysis. Sure, if sales and the influx of cash slows Apple will need that cash to pay off its bonds, but...
1. There's no reason to believe that's going to happen anytime in the near to distant future. They are in the midst of a super upgrade cycle which figures to result in record profits again when they report in January and that growth is likely to continue for the foreseeable future.
2. Pulling the cash from overseas doesn't make sense simply because they can issue bonds at a far lower rate, practically zero, than what they would pay in repatriation. I'm not so sure if the repatriation rate were lowered permanently that they would even bring much back at all. If it were a one-time benefit, then sure. If/when they need cash they can hold their nose and pay the tax rate, but I would argue that the market has already priced the supposed tax penalty into the share price. To put it another way, if they were granted a one-time repatriation rate far below what they would be forced to pay currently, you would see the share price jump because that is effectively adding billions of cash to their balance sheet from the federal government's.
3. Going back to the first point, if sales did slump they would probably need the cash anyway with or without the bond issuances. Hoarding enormous piles of cash to avoid taxes is a luxury of the few extraordinarily profitable international companies of the world, not those that have diminishing sales.
On number 2, there's no need to "pull" the cash from overseas because the 14% is a deemed tax rate, i.e you have no choice in the matter. Going forward it changes to a territorial system so the US won't be taxing international profits.
Apple will likely still issue debt because they can take on a lot more leverage given their cash flow and interest payments will still be deductible up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out on that) so it will still lower their cost of capital.
This does give them more flexibility on financing decisions and it will increase GAAP profit because Apple has been conservative and has been booking deferred taxes until now.
The question is why was there ever a dilemma in the first place. We were the only country to tax corporations this way, which made us incredibly uncompetitive -- but worse kept money from being invested in the US. This is great news for the USA and bad news for everywhere else in the world that would have otherwise received the investment. We should be doing everything possible to bring that money home.
Not really. Much of the money "kept offshore" is invested in the US[1]. Apple's money, in particular, is managed by their subsidiary in Reno called Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.
That money are the proceeds from Apples sales outside the US where they paid off Ireland to get essentially a 0% tax rate. No tax at all has been paid on these profits, and you are now asking for it to be transferred to the US for no tax either.
Now the proper thing would be for that money to be taxed in Europe, and the EU commission has been working on that to get Ireland in line, but right now you are essentially asking for the biggest company in the world to pay a 0% tax rate on their overseas profit.
The easy solution would be to tax all earnings worldwide equally, but that doesn't work either because then they will create a subsidiary in that country which will store the cash and the mother cooperation will have no earnings on it.
Actually thinking about it, this way of taxing is pretty much the same in every country in the world.
Excuse my completely naive and ignorant views and questions.
Moral issues aside, do they have to bring it back to US? I dont see what's wrong with it sitting there doing nothing.
Are there no other way to invest the $250B cash generating 2% yearly interest? i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )
Why is it every call to maximize only shareholders value? Could they not provide more value in their product or product line up with those additional Interest from Cash? Investing into better after sales services particular in South East Asia Region?
Apple could provide iPhone as a Services, much like iPhone upgrade program in the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic, and with top up like Apple Music and future Apple TV. Making Apple being the actual creditor themselves, that needs lots of cash.
As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier. There are lots of people in the world without Credit Card or dont want themselves associate with credit cards, which is different to US. And prefer to have Mobile Billing, a monthly payment. These people also failed to get iCloud backup, which is increasing dangerous as we put more important things in our phone. Apple could finally offer Visual Voicemail, and free iCloud Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music, Carrier Services, All under one monthly fees.
There are lots of thing to help and improve, invest to bring more value and future returns, dividends is ok, but share buy back to me seems dump. This is speaking from a long time $AAPL investor.
> Given Apple’s current balance sheet strategy and assuming no change to the U.S. corporate tax code, the company is on track to soon have $300 billion of cash, almost all of which is located abroad, and $150 billion of debt.
I don't understand business. If I owed $15,000 and had $30,000 in the bank, I'd pay off my debt. Why is this different?
Because to pay off the debt, Apple first would have to move the cash back to the US, at which time by the current tax law, it would be taxed by 35%. So, to pay back $150B, they would have to bring back about $230B, paying $80B in taxes.
But imagine your interest rate on the 15K loan is 2%. And if you withdrew the 30K you’d first lose 10K to taxes, yielding only 20K. And you actually make money on the 15K you were loaned by using it elsewhere.
I believe there’s some tax advantage for them. Possibly they can claim a tax deduction of some kind on the debt interest. And of course this way not only do they get that but they avoid paying any taxes on the profits they’ve funneled overseas.
(I am not an accountant so fully prepared to be told I am well wrong.)
If I was $15k in debt and had an interest rate like Apple's, no way would I prioritize paying off that debt. I'd invest the money I have and turn it into more.
> One fear that investors have with companies holding excess cash is that future management teams will waste the cash on frivolous M&A and other questionable investments. This results in the value of the cash being discounted, leading to a lower stock valuation.
Great example of why I maintain that price != value. The former is an objective metric while the latter is probably subjective to a problem, context, application, etc..
> Instead of using M&A to buy revenue or users, which is a disastrous strategy in Silicon Valley, Apple looks to fill asset holes in terms of technology and talent.
Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a disastrous strategy.
For every smart buy like YouTube there's been dozens of utter failures. MySpace. Netscape. Flickr. Softimage.
It's to the point where being acquired is the kiss of death for most start-ups. Sure, you get your exit, but your product is toast.
Apple has a very particular culture and it's difficult for other companies to integrate into that. Google was more accommodating, like with Nest, but even then they realized they had to restructure and make Alphabet for it to actually work.
Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled it.
It's insane that corporations are taxed less than individuals abroad. If you live abroad and work - you pay income tax, whether that money is repatriated or not.
That is the case for a handful of countries, the US among them. In the vast majority of countries you don't have to pay income taxes when you live and work abroad. Of course you still pay such taxes in the country where you live and work.
Since we already spend more on education, healthcare and social mobility now than ever before, pretty much nothing.
It’s like a mob unhappy with their winter meals seeing a large grain store that a prosperous farmer has stored up to plant next years harvest with, and saying “Let’s eat that until we are full!”.
That assumes some of this isn't baked into the price already. But yes, if you think the market hasn't factored in any one or more of these potential actions, then buying the stock would be the most logical way to profit...
> This has led Apple, along with other Silicon Valley firms, to keep foreign cash offshore as it is the financially prudent thing to do for shareholders.
The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system. And it worked. If our political system was not up for sale they would have eventually had to bring the cash home and pay their damn taxes.
Why should American corporations pay both foreign and US corporate tax on income made overseas? Almost no other country requires this of their companies and it's a major competitive disadvantage for American businesses.
------------------------------------------------
Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
> The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system.
the US levels of taxation are higher than the vast majority of other countries. it even goes further in taxing profits made overseas than other countries.
how can we honestly hold that against these companies?
[+] [-] dkrich|8 years ago|reply
1. There's no reason to believe that's going to happen anytime in the near to distant future. They are in the midst of a super upgrade cycle which figures to result in record profits again when they report in January and that growth is likely to continue for the foreseeable future.
2. Pulling the cash from overseas doesn't make sense simply because they can issue bonds at a far lower rate, practically zero, than what they would pay in repatriation. I'm not so sure if the repatriation rate were lowered permanently that they would even bring much back at all. If it were a one-time benefit, then sure. If/when they need cash they can hold their nose and pay the tax rate, but I would argue that the market has already priced the supposed tax penalty into the share price. To put it another way, if they were granted a one-time repatriation rate far below what they would be forced to pay currently, you would see the share price jump because that is effectively adding billions of cash to their balance sheet from the federal government's.
3. Going back to the first point, if sales did slump they would probably need the cash anyway with or without the bond issuances. Hoarding enormous piles of cash to avoid taxes is a luxury of the few extraordinarily profitable international companies of the world, not those that have diminishing sales.
[+] [-] IBM|8 years ago|reply
Apple will likely still issue debt because they can take on a lot more leverage given their cash flow and interest payments will still be deductible up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out on that) so it will still lower their cost of capital.
This does give them more flexibility on financing decisions and it will increase GAAP profit because Apple has been conservative and has been booking deferred taxes until now.
[+] [-] matt_wulfeck|8 years ago|reply
[+] [-] icebraining|8 years ago|reply
Not really. Much of the money "kept offshore" is invested in the US[1]. Apple's money, in particular, is managed by their subsidiary in Reno called Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.
[1] https://www.hsgac.senate.gov/subcommittees/investigations/me...
[+] [-] revelation|8 years ago|reply
Now the proper thing would be for that money to be taxed in Europe, and the EU commission has been working on that to get Ireland in line, but right now you are essentially asking for the biggest company in the world to pay a 0% tax rate on their overseas profit.
[+] [-] cowsandmilk|8 years ago|reply
[+] [-] throwaway_45|8 years ago|reply
[+] [-] icantdrive55|8 years ago|reply
[deleted]
[+] [-] SaltySolomon|8 years ago|reply
Actually thinking about it, this way of taxing is pretty much the same in every country in the world.
[+] [-] skywhopper|8 years ago|reply
Tax is assessed on income, not revenue. It's an important distinction. Apple had 52.6 billion in revenue, and 10.7 billion in income.
[+] [-] elephant_burger|8 years ago|reply
[+] [-] ksec|8 years ago|reply
Moral issues aside, do they have to bring it back to US? I dont see what's wrong with it sitting there doing nothing.
Are there no other way to invest the $250B cash generating 2% yearly interest? i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )
Why is it every call to maximize only shareholders value? Could they not provide more value in their product or product line up with those additional Interest from Cash? Investing into better after sales services particular in South East Asia Region?
Apple could provide iPhone as a Services, much like iPhone upgrade program in the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic, and with top up like Apple Music and future Apple TV. Making Apple being the actual creditor themselves, that needs lots of cash.
As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier. There are lots of people in the world without Credit Card or dont want themselves associate with credit cards, which is different to US. And prefer to have Mobile Billing, a monthly payment. These people also failed to get iCloud backup, which is increasing dangerous as we put more important things in our phone. Apple could finally offer Visual Voicemail, and free iCloud Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music, Carrier Services, All under one monthly fees.
There are lots of thing to help and improve, invest to bring more value and future returns, dividends is ok, but share buy back to me seems dump. This is speaking from a long time $AAPL investor.
[+] [-] nathan_long|8 years ago|reply
I don't understand business. If I owed $15,000 and had $30,000 in the bank, I'd pay off my debt. Why is this different?
[+] [-] _ph_|8 years ago|reply
[+] [-] redler|8 years ago|reply
[+] [-] unk|8 years ago|reply
[+] [-] erentz|8 years ago|reply
(I am not an accountant so fully prepared to be told I am well wrong.)
[+] [-] kelnos|8 years ago|reply
[+] [-] unknown|8 years ago|reply
[deleted]
[+] [-] megy|8 years ago|reply
[+] [-] blueprint|8 years ago|reply
Great example of why I maintain that price != value. The former is an objective metric while the latter is probably subjective to a problem, context, application, etc..
[+] [-] gman83|8 years ago|reply
Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a disastrous strategy.
[+] [-] astrodust|8 years ago|reply
It's to the point where being acquired is the kiss of death for most start-ups. Sure, you get your exit, but your product is toast.
Apple has a very particular culture and it's difficult for other companies to integrate into that. Google was more accommodating, like with Nest, but even then they realized they had to restructure and make Alphabet for it to actually work.
Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled it.
[+] [-] leoh|8 years ago|reply
[+] [-] Thiez|8 years ago|reply
[+] [-] maxehmookau|8 years ago|reply
Ah well, at least Apple shareholders get a few more dollars.
[+] [-] valuearb|8 years ago|reply
It’s like a mob unhappy with their winter meals seeing a large grain store that a prosperous farmer has stored up to plant next years harvest with, and saying “Let’s eat that until we are full!”.
Yea but you’ll be starving next winter.
[+] [-] moxious|8 years ago|reply
[+] [-] mempko|8 years ago|reply
[+] [-] thebiglebrewski|8 years ago|reply
[+] [-] adamw2k|8 years ago|reply
[+] [-] kondro|8 years ago|reply
$884B market cap. $150B in free cash (which you can effectively take off the top of the market cap).
So an adjusted market cap of $734B.
A net income after tax (yes, they still pay tax) of $48B.
So an adjusted P/E of 15.3x.
Some other P/Es of popular tech companies:
Facebook: 33.14x Google: 35.03x Salesforce: 12,992x Amazon: 293.84 Intuit: 41.36 Twitter: Can't have a P/E if you don't make money.
[+] [-] jacksmith21006|8 years ago|reply
[+] [-] tzakrajs|8 years ago|reply
[+] [-] guelo|8 years ago|reply
The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system. And it worked. If our political system was not up for sale they would have eventually had to bring the cash home and pay their damn taxes.
[+] [-] wildmusings|8 years ago|reply
------------------------------------------------
Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
[+] [-] austenallred|8 years ago|reply
So far as I can tell Apple is getting absolutely hammered under the terms of this new tax bill, so I'm not sure this is the case https://www.bloomberg.com/news/articles/2017-11-03/multinati...
[+] [-] garmaine|8 years ago|reply
[+] [-] ringaroundthetx|8 years ago|reply
Remember to commend them for that spot on analysis.
Standing ovation on my end
I'm extremely excited for the territorial system and those implications for US world-citizens.
[+] [-] Shivetya|8 years ago|reply
how can we honestly hold that against these companies?
[+] [-] unknown|8 years ago|reply
[deleted]