Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO) and other technology companies could gain from President-elect Donald Trump's support of a one-time repatriation of U.S. companies' corporate profits held overseas — if the idea gets enacted by a still-Republican-held Congress.
Trump has proposed a 10% repatriation tax on profits of U.S. corporate foreign subsidiaries, down from the statutory 35%. The top five overseas cash holders are Apple, Microsoft, Google-parent Alphabet (GOOGL), Cisco and Oracle (ORCL).
Trump's cash repatriation proposal "could bring a flood of money back into the U.S. that would be available for dividends, share buybacks and possibly for capital investments," said Kevin Logan, an HSBC economist, in a research report. "The tax revenue raised could be used to fund an infrastructure spending program, something that was advocated by both candidates during the presidential campaign."
Moody's Investor Service says Apple is on track to have $230 billion in overseas cash by the end of 2016, followed by Microsoft at $113 billion, Cisco at $62 billion, Oracle at $52 billion and Google at $49 billion. It projects that the top five will have $505 billion overseas by year-end, or 86% of their total cash, up from $441 billion in 2015.
"We expect most companies would take advantage of a hypothetical tax reduction on permanently repatriated moneys to the maximum extent possible, but the devil is always in the details," Moody's analyst Richard Lane told IBD via email. " Nevertheless, a hypothetical 10% tax on the $1.3 trillion offshore that we project for 2016 translates into $130 billion in tax revenue that could be invested in efficiency enhancing, domestic infrastructure investments.
"More important than temporary, one-time tax relief, however, would be permanent tax reform that provides companies clarity to make long-term capital allocation decisions."
Trump has also proposed reducing the U.S. corporate tax rate to 15%, down from 35%, in an effort to keep companies from leaving for countries with lower rates.
"Given the Republican control, there is a possibility of some tax relief to incent companies to bring foreign cash back to the U.S. offering an opportunity for them to invest, buyback stock and acquire assets," Abhey Lamba, a Mizuho Securities analyst, said in a report.
Walter Pritchard, a Citigroup analyst, says a Republican-controlled House and U.S. Senate "is not likely to block" the 10% cash repatriation proposal. Republicans kept a narrow lead in the Senate and maintained a solid advantage in the House.
Pritchard says Adobe Systems (ADBE), Autodesk (ADSK), Citrix Systems (CTXS), Red Hat (RHT) and VMware (VMW) are among companies that could bring back cash.
"We believe the chances increase of a larger share repurchase or (lesser chance) dividend from these companies," Pritchard said in a research report.
Drug Companies Also Have Lots Of Cash Overseas
The biotechs with sizable overseas holdings include Amgen (AMGN), Medtronic (MDT) and Gilead Sciences (GILD), says a UBS research report. It says other companies with lots of overseas cash include Johnson & Johnson (JNJ) and Coca-Cola (KO).
"While the specifics would depend on the ultimate legislation, we would expect that a significant amount of the overseas cash balances (perhaps 75% or greater) would be repatriated and used to continue to repurchase shares and pay dividends, but also to increase the pace of M&A and growth capex, of which the latter has been a missing component in the current cycle," UBS analyst Julian Emanuel said in the report.
Among big tech stocks, Oracle was up 1.1% to 39.55 and Cisco added 1.2% to 31.36 at the close on the stock market today. Meanwhile, Apple was down a fraction to 110.88 and Alphabet slipped 0.8% 805.59. Microsoft shares dipped 0.5% to 60.17.
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