Apple's Big Cash Winners: Shareholders
January 19 2018 - 5:59AM
Dow Jones News
By Tripp Mickle
Apple Inc. announced a $38 billion tax windfall for the U.S.
government this week, but the biggest beneficiary of the company's
response to tax-system changes will likely be its shareholders,
analysts say.
The tech giant's plan to bring back to the U.S. most of its
$252.3 billion in overseas cash holdings is expected to lead to a
large increase in share buybacks and dividends, say analysts, tax
experts and investors, and the change in tax law should boost
Apple's bottom line by cutting its effective tax rate. The changes
also raised some investors' hopes that Apple will ramp up
acquisitions and research-and-development spending to reduce its
iPhone dependency.
"They're getting to unlock something that's been growing for a
long time and that's a real positive," said Trip Miller, money
manager at Gullane Capital Partners, a Memphis, Tenn.-based hedge
fund that counts Apple among its largest holdings. "Now it's all
about what they do with the capital."
Apple on Wednesday announced the planned $38 billion tax
payment, the fruit of the U.S. tax overhaul adopted last month. The
new law levies a one-time tax on overseas profits held in cash and
other liquid assets--but at a much-reduced 15.5% rate. Apple, which
for years has kept its foreign profits offshore to avoid paying the
previous higher rate, said it will now bring most of that cash
home.
Apple finance chief Luca Maestri last year said bringing
overseas cash home would give it more flexibility to return money
to shareholders, but the company hasn't offered more detail since.
An Apple spokeswoman declined to comment for this article.
The iPhone maker has been pumping cash to shareholders since
fiscal 2012, with $234 billion in share repurchases and dividends,
funded by borrowing and the cash its business generates. Last year
it said it expects the total to hit $300 billion by March 2019.
Loup Ventures, a venture-capital firm specializing in tech
research, now expects Apple to announce an increase of between $125
billion and $150 billion in buybacks and dividends through
2020--pushing the total target as high as $450 billion. Loup
attributes $88 billion of that increase to the new tax system,
pegging $71 billion for buybacks, $12 billion for a one-time
special dividend and $5 billion in dividend increase over two
years.
That projected $88 billion for investors compares with roughly
$75 billion that Apple said it plans to contribute over the next
five years to the U.S. economy through capital expenditures,
investments in U.S. manufacturing, and its $38 billion tax
commitment.
"I think they have struck the right balance between the fat cats
and the everyday person," said Gene Munster, Loup Ventures'
managing partner.
Apple has other options. It could use the cash to pay off its
$116 billion in debt--largely used to fund buybacks--rather than
return more money to shareholders, Mr. Munster said. It also could
hold on to much of it, as before it began returning cash to
shareholders in 2012.
Investors also are expected to benefit from a lower effective
tax rate that will lift earnings. Though Apple has reported an
effective tax rate of about 25% over the past three years, Jennifer
Blouin, an accounting professor at the University of Pennsylvania's
Wharton School, estimates its current rate is closer to 18%: 42% in
combined federal and state taxes on its U.S. profits, a third of
the total, and 6% on its overseas profits, the remaining two
thirds.
She expects Apple's effective rate to drop to about 16% as the
decline in the U.S. tax rate to 21% from 35% offsets a new tax of
10.5% on some foreign profits.
It is "absolutely...good news" for investors, she said.
Investors expect Apple to invest some of its repatriated cash in
becoming less reliant on the iPhone, which accounts for two-thirds
of sales. They would like to see an increase in R&D spending,
which rose 15% to $11.58 billion last year, and acquisitions of
small companies working in areas Apple is expanding into, such as
augmented reality.
Apple has never spent more than $3 billion on an acquisition--
the largest being Beats in 2014--but other investors are clamoring
for a big deal to accelerate its push into original video.
Acquiring the likes of a movie studio or Netflix Inc. could give
the business scale, said Arif Karim, a senior investment analyst at
Ensemble Capital Management, a Burlingame, Calif., wealth manager
that counts Apple among its largest holdings.
"The smartphone market is mature," Mr. Karim said. "The next
thing to do is see if you can create another market."
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
January 19, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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