What Will Apple do With All its Cash?
01/31/2018 5:00 am EST
Everything about Apple (AAPL) is huge. Revenue runs huge at $229 billion annually. A huge net income margin, 21% of late, ensures that a huge amount of revenue, $48.4 billion, drops to the bottom line as net income, explains Steve Mauzy, editor of Wyatt Research's Daily Profit.
The equity market cap is huge. It exceeds $920 billion. No publicly traded company is worth more; no publicly traded company comes close. The cash account — the foreign cash account, specifically — puts it all over the top.
Apple reported that its foreign subsidiaries held $252.3 billion of cash, cash equivalents, and marketable securities at the end of the fiscal year 2017.
But why does Apple hold so much cash over there? Income taxes. High corporate income taxes have made repatriating foreign cash economically unfeasible.
Apple CEO Tim Cook groaned publicly on the matter a couple years ago: “When we bring it back [Apple’s cash], we will pay 35% federal tax and then a weighted average across the states that we're in, which is about 5%, so think of it as 40%. We've said at 40%, we're not going to bring it back until there's a fair rate. There's no debate about it.”
Groan and you shall receive. Corporate tax relief was delivered in the waning days of 2017. The corporate income tax rate was lowered to 21% from 35%.
An additional carrot was also on offer: The new tax law includes a one-time 15.5% income-tax rate applied to foreign cash and liquid assets.
The carrot, though, is backed with a stick: The new law requires corporations to pay the repatriation tax rate of 15.5% on cash and liquid assets. The tax must be paid whether or not the assets are repatriated.
Apple will pay. It expects to pay $38 billion to the U.S. Treasury just on its foreign holdings this year. The amount will likely be the largest of its kind. No one at Apple groans, though. CEO Cook is practically giddy.
Cook said that Apple will commit $350 billion to the U.S. economy (specifics conventionally undefined) over the next five years. Cook expects Apple to inject $55 billion into the U.S. economy over the course of 2018. Twenty-thousand new Apple jobs are part of the mix.
That is a lot of happy talk from a happy CEO. But let’s remove the kaleidoscopic spectacles for a minute. Business distills to numbers. Investors know this; Apple management knows it.
New consequential investments are few and far in between for a company of Apple’s immense girth. Apple suffered from a lack of investment opportunities under the old tax regime. The new tax regime compounds the problem: even more cash will need to be allocated.
Share buybacks provide one outlet for excessive liquidity. UBS estimates that Apple could purchase as much as 25% of its outstanding shares over the next three years. Combined with existing spending on buybacks, Apple could purchase $173 billion of its stock.
With Apple shares trading at a record high and with the P/E multiple approaching 19, the buyback directive is less appealing. Top-line growth has decelerated to a mid-single-digit rate. Buying low growth at a high multiple makes less sense.
I see a more sensible outlet. I expect Apple to direct fewer dollars toward share buybacks and direct more money toward dividends.
For all its hugeness, Apple’s dividend is relatively small. The dividend -- paid at $2.52 per share -- yields only 1.4%. An immediate 15% increase in the regular dividend would be sensible, but still insufficient. A 15% dividend increase would absorb only $2 billion in the first year. A lot of cash -- excess cash -- would remain in the till.
Supplementing a regular-dividend increase with a special dividend is the most sensible use of Apple’s excess cash. A special dividend wouldn’t commit Apple to large, continual dividend increases. A special dividend would immediately clear away excess cash, thus ensuring high returns on invested capital.
As for the amount, a special dividend of $10 to $15 per share is within the realm of possibilities. At the low end, $51 billion of excess cash is removed from the books; at the high end, $76 billion is removed. Ample cash would still remain to fund and run the business efficiently.
Most important, a special dividend would enhance Apple’s value proposition from the investor’s perspective: Investors would receive an immediate return. Apple would maintain high returns on investment capital.
The stage would be set for higher regular dividend increases and additional special dividends. Sounds like a recipe for future share-price appreciation to me.