Why Apple Inc. (AAPL) Stock Wouldn’t Get the Best of a Tax Holiday

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Two business headlines caught my fancy recently, and while only one had anything to do with Apple Inc. (NASDAQ:AAPL), they have made me consider the quandary the iPhone maker faces regarding its foreign cash holdings. It’s an issue that has been pushed to the backburner between iPhone 8 rumors and the company’s upcoming earnings report, but it still has important implications for AAPL stock.

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Let’s dive in.

Apple Cash Hoard

Moody’s recently studied the cash hoards of nonfinancial U.S. companies and found these companies held $1.84 trillion (as of Dec. 31, 2016) in cash, with about 70% outside the U.S. — 11% higher than a year earlier.

The No. 1 hoarder of cash? None other than Apple at $246.1 billion, approximately 93% of which was held overseas.

The consensus is that companies like Apple, who are unable to repatriate their foreign cash lest they pay a significant amount of tax, are eager for President Trump’s proposed tax reforms to take effect.

Trump’s Tax Reform

Currently, Apple (and every other U.S. company) is subject to a 35% tax on each dollar of cash it brings home from overseas banks. Trump is proposing a one-time tax holiday where companies would pay just 10% on repatriated cash; those companies would then lose the ability to defer taxes on corporate income earned overseas.

In 2015, CEO Tim Cook appeared on 60 Minutes in an interview with Charlie Rose. He said he had no intentions of bringing back the cash until the tax rules change.

“This is a tax code, Charlie, that was made for the industrial age, not the digital age,” Cook told Rose at the time. “It’s backwards, it’s awful for America, it should have been fixed years ago, it’s past time to get it done.”

I like Tim Cook, and I think he’s a pretty good CEO, but those are the words of a self-interested CEO, not a concerned citizen. According to Moody’s, the top five companies on its cash hoarders’ list hold 88% of their money overseas.

All five of these CEOs stand to benefit in a big way from the repatriation of cash. Cook is at the top of the list.

Apple Stock Repurchases

The second article that got me thinking about AAPL stock is something that came across the wire about a hedge fund manager who owns Abercrombie & Fitch Co. (NYSE:ANF) shares. He’s calling on it to execute a Dutch tender to buy back $200 million of its stock (approximately 30% of its shares) while reducing its annual dividend by 78% to 18 cents annually, a 1.9% yield.

Share repurchases have become the cocaine of corporate America where they are the answer to everything that ails you.

Poppycock!

If Apple gets to take advantage of the 10% one-time tax holiday, a quick calculation ($246.1 billion multiplied by 93% and then by 10% for the tax) suggests it would save $46 billion in tax under Trump’s proposal. That leaves $206 billion for various capital allocation uses including share repurchases, debt repayment, acquisitions, research and development.

It all sounds like great news for AAPL stock holders. But before you break out the bubbly, you ought to consider the counterarguments.

Yes, There Are Downsides

In no particular order …

  1. CEOs with too much cash to spend usually fritter it away on expensive acquisitions and internal initiatives that end up in the garbage bin with little to show but an impairment charge.
  2. Have you taken a look at AAPL stock lately? It’s not exactly suffering, trading within 4% of an all-time high. At least in the case of Abercrombie, its stock is trading at its lowest level in the past 20 years. Apple buying back stock at these levels is utter nonsense and a complete waste of shareholder capital.
  3. Paying down Apple’s $85 billion in long-term debt would be a proper use of funds, but it can already do this without a tax holiday in less than two years by ending share repurchases. Of course, Cook wouldn’t have the $206 billion cash hoard to play around with, and what fun is that?
  4. Let’s not forget the taxpayer who loses out on $68 billion in revenue so Apple shareholders can get even more riches bestowed on them. Hey, I’m all for capitalism, but somebody has to pay for Trump’s ridiculously high defense budget.

Bottom Line on AAPL Stock

The worst-case scenario for Apple is that the one-time tax holiday doesn’t make it into the tax reform package.

Ultimately, whether Trump does it or the next President does, corporate taxes will come down. When that happens, Apple brings the cash home, paying whatever the corporate tax rate is at that time.

Whether it’s 10%, 15%, even 20% … what’s the difference when we’re talking about $200 billion-plus in cash.

I like to think of Apple’s foreign cash dilemma as a forced-savings plan that makes it think more creatively about how to allocate capital for its business and shareholders.

Like most lottery winners, Cook and company will probably blow the money if given a chance. We’ll find out soon enough.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/why-apple-inc-aapl-stock-wouldnt-get-the-best-of-a-tax-holiday/.

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