Apple cash reserves

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Senate proposal could allow Apple to repatriate $178B foreign cash, but unlikely to pass

If you were confused by Apple having to repeatedly borrow money to fund stock buybacks while sitting on huge cash reserves ($178B as of last quarter), the reason is that the bulk of that cash is held overseas. Apple can’t bring it back into the USA without paying 35% tax on it, so it’s far cheaper to borrow.

Bloomberg reports that Senators Rand Paul (R) and Barbara Boxer (D) are proposing a bill that would allow companies like Apple to repatriate foreign-held cash while paying just 6.5% tax rather than 35%. The tax raised by this would, they propose, go to the Highway Trust Fund to pay for infrastructure programs across the USA.

It wouldn’t help Apple’s stock buybacks, however: companies taking advantage of the scheme would only be allowed to spend the money on investment, such as R&D and acquisitions. It specifically could not be spent on stock buybacks or executive compensation.

The chances of the bill making it into law seem slim. Business Insider notes that a previous repatriation program that did make it onto the statute books appeared to backfire, a government study finding out that the companies who took advantage of it actually cut both R&D spending and jobs.

The Joint Committee on Taxation also concluded that a similar proposal put forward last year would actually end up costing the government money in the long-term, and Senate Finance Committee head Orrin Hatch said the latest proposal wouldn’t increase government revenues and was “bad policy.”

Part of the reason for that is that if companies get one tax holiday, they will assume there will be others in future. It thus incentivizes them to push more profits overseas in the belief that they can bring them back next time around.

With Apple having just announced world record quarterly earnings, and having been investigated for taking advantage of legal tax avoidance schemes overseas, the public mood may also not be too supportive of the company getting a tax break in its home country.

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AAPL spending almost all its US cash reserves on dividends and stock buybacks

Analysis by Above Avalon‘s Neil Cybart suggests that Apple is unlikely to accelerate the pace of its stock buyback program as it is already spending almost all of its available US cash stockpile on share dividends and buybacks.

Out of $155B of cash, only $18B is available in the U.S., with the rest sitting in international subsidiaries unable to be sent back unless repatriation tax is paid […] Apple is essentially taking most, if not all, of its free cash flow from U.S. operations and piling it into share buyback.

Cybart does some number-crunching to suggest that Apple is likely to buy back around $30B worth of stock next year, though acknowledges that new product lines like the Apple Watch make it difficult to forecast future profits with any certainty.

Apple has come under consistent pressure from billionaire shareholder Carl Icahn to increase the pace of its stock buyback program, recently suggesting that an accelerated buyback could see the company achieve a trillion dollar valuation. It was recently estimated that Apple’s cash reserves would have reached $210B without the dividend and stock buyback program started two years ago.

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Apple’s second bond sale more than three times over-subscribed

Apple’s second major bond sale, designed to raise cash for the stock buybacks Tim Cook promised in the company’s latest earnings call, was more than three times over-subscribed, reports the WSJ.

Apple sold $12 billion of debt of varying maturities at interest rates that were mostly less than a percentage point above comparable U.S. Treasury debt, highlighting widespread faith in the iPhone maker’s prospects. Investors flocked to the offering, placing more than $40 billion in orders.

This followed a $17B bond sale almost a year ago, which set a new record for corporate debt. In both cases, Apple only had to offer interest rates marginally higher than Treasury bonds, which are considered the safest form of investment.

Although it may seem odd for a company as cash-rich as Apple to need to borrow money, the position arises because the majority of the $150B cash Apple owns is held overseas. If Apple were to repatriate the cash, it would be taxed at a rate far higher than the interest rate it has to pay on the bonds.