In a press release about accelerating the company’s U.S. investment Apple announced that it would pay an estimated $38 billion in repatriation taxes on its overseas cash and investments. This would allow the company to bring an estimated, and I emphasis estimated, $207 billion of its $252.3 billion that was overseas as of September 2017. When you go through the items where Apple could spend the money it will probably be applied to stock buybacks. (Note that I own Apple shares).
It is interesting that the company announced what it plans to do when the stock market was open on Wednesday. Apple’s shares jumped $2 in two hours and closed up almost $3 for the day. This type of news usually becomes public after the market closes.
While the press release didn’t state how much net cash the company could wind up with using a 15.5% tax rate it can be estimated. This is more of a worst-case scenario since there is an 8% tax rate for earnings that have been reinvested in the company’s business, such as non-U.S. property, plants and equipment. To calculate the estimated net cash that could be brought back these are the steps.
- Using a tax payment of $38 billion
- Then divide it by the 15.5% tax rate
- Calculates that the total cash that could be brought back is $245 billion
- Subtract the $38 billion in taxes
- Leaves $207 billion in net cash
Why bringing back overseas cash is so important
The key to paying dividends and buying back stock is that U.S. cash has to be used. Even if debt is raised in other currencies for these purposes the repayment still has to be with U.S. cash.
Hopefully Tim Cook, Apple’s CEO, and Luca Maestri, Apple’s CFO, will update investors on its dividend and stock buyback plans on the February 1 conference call versus waiting until the March quarter results call. If they don’t they will get a number of questions on the February 1 call and then from institutional investors and the press for three months. They should at least give some insights, if not actual amounts.
Continues to generate a huge amount of cash each year
Before we dive into what the $207 billion could be used for, keep in mind that the company generates a huge amount of cash each year. In fiscal 2016 and 2017, Apple generated $65.8 and $63.6 billion, respectively, in operating cash flow. After subtracting over $12 billion in capital expenditures for both years the company had $54 and $53 billion, respectively, in free cash flow. And this should increase in future years due to the reduction in the corporate tax rate from 35% to 21% and from organic revenue and profit growth.
The cash isn’t needed for acquisitions
The largest acquisition Apple has ever done was $3 billion for Beats. Since Apple hasn’t shown an inclination for large acquisitions, I believe very little, if any, of the $207 billion will be used for them.
There has been speculation about various large companies Apple could buy. I’ve calculated that it would cost the company $202 billion to buy Disney before it buys Fox assets, Netflix would be $87 billion or PayPal would be $107 billion. It may turn out that Apple decides to do a huge acquisition and has just been waiting to use the overseas cash. But I give any of these or another large acquisition low odds.
Already fully funding Research and Development
Apple fully funds it R&D spending on a yearly basis and doesn’t need the extra cash for this. While some investors want the company to ratchet it up even more than it has (almost doubled in the past three years), Apple could handle any increase from its yearly profits.
Apple could pay down debt
Apple had almost $116 billion in debt as of September last year. The tradeoff between using the new cash to pay down some or all of the debt should be based on what the current debt costs versus what the cash could otherwise be used for. With most of the company’s interest rates running in the low single digits I don’t believe much, if any, debt will be prepaid. Again since it generates such a substantial amount each year it doesn’t need to be in any hurry to pay it down.
I give a one-time dividend lower odds
Apple could opt for a one-time dividend and it could be substantial. However this is a short-term move and I believe Cook and the Board thinks long-term.
There are also some political considerations to take into account, since there is a lot of press that the tax reform package benefits corporations and wealthy individuals more than the average person. A one-time dividend falls into the wealthy individual side of the equation.
Increasing the annual dividend is a no brainer
An increase to Apple’s dividend is definitely in the cards, the question is how much. For the past three years, it has been raised by 11%, 10% and 11%, respectively. At the current $2.52 per year, the dividend’s yield is 1.4% and costs the company about $13 billion. Apple wasn’t able to cover its dividend payments from U.S. generated cash last year so having this extra cash relieves this situation.
I believe Apple will increase the dividend by at least 11% and maybe up to 20% but may be reluctant to go much higher even though it could. This is because management and the board will want to continue to increase it every year and the compounding impact will become more pronounced after four or five years. It may be better to give it a nice bump and use the excess cash to buy back more stock, which decreases the need for dividend payments.
Stock buybacks is probably where most of it is used
This is probably where the bulk of the extra cash gets used. It has the benefit of bringing down the share count to increase EPS and lowers the cash need for dividends. It could make a lot of sense for Apple to execute another Accelerated Share Repurchase Agreement to retire a large number of shares.
With the stock sporting a PE multiple of 15.5x on fiscal 2018 EPS estimates buying shares is the equivalent of a 6.5% return. While it is not as good as compared to when the shares were much lower, it isn’t that bad of a guaranteed long-term return.
