updated 06:50 pm EDT, Mon March 11, 2013
Wall Street, government wants more of company's growing cash hoard
Despite moves to buy back shares in itself and the creation of a dividend program, Apple adds money to its enormous cash reserve far faster than it can distribute it -- a problem many companies would like to have, but one that is actually quite thorny for Apple. Wall Street appears to be orchestrating an effort -- or acting on insider information -- to put pressure on the company to make some kind of announcement for a future, additional dispersal of cash to investors. Meanwhile, governments have increased their calls for the "repatriation" of foreign-held profits.
At the end of December, Apple had over $137 billion in cash, cash equivalents and long- or short-term securities with no debt (despite a number of ongoing large-scale construction projects and corporate acquisitions -- a point both Steve Jobs and Tim Cook have made in conference calls with analysts). It added $16 billion to that total in the last quarter alone, but has only announced plans to give out around $45 billion -- over the course of three years. According to Howard Ward, CIO of Gamco Investors, Apple is likely to add $42 billion or more to its cash reserves in 2013 alone.
Consequently, calls from investors for additional dispersal methods have increased. After allowing Apple to hold onto its cash -- mostly by way of the refusal of then-CEO Steve Jobs to cooperate with investors -- Wall Street now demands additional return on investments in the company, particularly now that the stock is no longer setting all-time records on a monthly basis. Long-term investors have benefitted tremendously from Jobs' and Cook's management of the company, but now having been given a small dividend at long last, the floodgates are opening for return of much more of Apple's cash.
As Topeka Capital Markets analyst Brian White noted, the first anniversary of Apple's dividend announcement is just over a week away, and White told investors that the company is in "a good position" to make a further announcement around that time to help make the stock more attractive to a wider investment audience. Such a move could see it rise more rapidly than the stop-start malaise that has seen it fall from a high of $705 last fall to a low of $419 (it is currently up to $437 as of Monday's close).
While White suggests an increase in the quarterly dividend (upwards to as much as $5 per quarter) and an expansion of the stock buyback program (increasing the program to $100 billion over five years), renowned investor Warren Buffet believes Apple should focus on continuing its successful management of the business and increase its stock buyback as a way of returning cash to investors, ignoring "silly sideshow" lawsuits from speculators. Ward offers no specific plan, but also believes Apple will make an announcement in the near future of some additional measures. Without any action, the reserve could grow to over $240 billion by 2015, AppleInsider suggests.
Part of the issue that is complicating matters is that a significant portion of Apple's cash is held overseas in lower-tax and tax-friendly havens. Apple's foreign operations have seen significant growth in recent years and as a result, an increasing portion of the company's revenue is generated -- and stays -- overseas. While Apple can easily afford to spend its US cash on the modest program it has announced, expanding any cash distribution could force the company to consider "repatriating" some of its foreign capital, which would then make it subject to US tax rates.
Apple currently pays a roughly 25 percent average tax rate on its US earnings, but has tried -- like most other large corporations -- to fulfill its legal obligation to investors by maximizing its revenue, in part through finding every legal option to avoid paying a higher tax rate than necessary. Apple, along with Google, Amazon and others have been criticized both in the US and in other countries like the UK for "dodging" taxes by funnelling operations (and thus sales) through lower-tax countries. Apple, for example, has its European operations based in Ireland -- which has a substantially lower tax rate than most of the rest of Europe.
Forbes and other investor-oriented publications have argued -- correctly -- that this is not only perfectly legal, but explicitly allowed under EU tax codes, and that Apple and others are not guilty of "dodging" taxes so much as managing tax liability to the best possible advantage. Profits are taxed at the rate provided for by the EU country in which the company has its main operations, not every country in which it sells products. The end result of this, however, is that by funnelling all European sales through Ireland, Apple ends up with tax credits in many countries -- so even though it dutifully pays Irish corporate taxes on its earnings, the overall European rate of tax is roughly two percent.
Various governments -- but particularly the deficit-plagued United States -- have called for changes in the law to force companies to "repatriate" their foreign profits more appropriately. Some estimates have Apple's offshore cash at around $40 billion, which if all of it were brought into the US and taxed at the maximum corporate tax rate of 35 percent would cause the company to pay some $13 billion in taxes. From a government and consumer point of view, this is a good idea -- but from an investor point of view, its $13 billion that the company could give to investors rather than any specific government.
The "solution" proposed by some is to have a temporary lowering of the corporate tax rate for repatriation -- Apple itself, along with 60 large US corporations, has long lobbied for exactly such a proposal. It would lower the corporate tax rate in exchange for bringing the money out of tax havens (where it mostly sits and collects interest) and into the US economy. Though the proponents claim such a move would create US jobs and aid the government, a previous and similar "tax holiday" was tried in 2004. It did result in enormous repatriation of funds, but studies afterward showed that most of the imported money was simply used for investor dividends and executive bonuses -- not new jobs or other expansion.
It should be noted that the current administration has offered to permanently lower the maximum corporate tax rate to 28 percent and make some other adjustments in deductions, but as long as it is substantially higher than places like Ireland (12.5 percent for trade income versus 15-35 percent in the US) Apple is unlikely to "repatriate" much of its overseas profits until tax law changes there or here give the company an incentive to do so. Ironically, it is US tax law that requires corporations to be as diligent in finding ways to avoid paying taxes as they are in prioritizing stockholders when deciding how to spend corporate profits.
For now, it is possible that Apple may announce some additional distributions without having to dip into foreign funds to "finance" the handouts to investors -- but as foreign markets become a larger source of Apple's profits, the day is coming where multinational corporations and various governments around the world will have to make some hard decisions about the current "loopholes" in tax code and how best to reward investors while paying a fair share of tax obligations.