
The End to Apple’s Cash Dilemma - imartin2k
https://www.aboveavalon.com/notes/2017/12/12/the-end-to-apples-cash-dilemma
======
dkrich
Not sure I agree with the urgency angle to this analysis. Sure, if sales and
the influx of cash slows Apple will need that cash to pay off its bonds,
but...

1\. There's no reason to believe that's going to happen anytime in the near to
distant future. They are in the midst of a super upgrade cycle which figures
to result in record profits again when they report in January and that growth
is likely to continue for the foreseeable future.

2\. Pulling the cash from overseas doesn't make sense simply because they can
issue bonds at a far lower rate, practically zero, than what they would pay in
repatriation. I'm not so sure if the repatriation rate were lowered
permanently that they would even bring much back at all. If it were a one-time
benefit, then sure. If/when they need cash they can hold their nose and pay
the tax rate, but I would argue that the market has already priced the
supposed tax penalty into the share price. To put it another way, if they were
granted a one-time repatriation rate far below what they would be forced to
pay currently, you would see the share price jump because that is effectively
adding billions of cash to their balance sheet from the federal government's.

3\. Going back to the first point, if sales did slump they would probably need
the cash anyway with or without the bond issuances. Hoarding enormous piles of
cash to avoid taxes is a luxury of the few extraordinarily profitable
international companies of the world, not those that have diminishing sales.

~~~
IBM
On number 2, there's no need to "pull" the cash from overseas because the 14%
is a deemed tax rate, i.e you have no choice in the matter. Going forward it
changes to a territorial system so the US won't be taxing international
profits.

Apple will likely still issue debt because they can take on a lot more
leverage given their cash flow and interest payments will still be deductible
up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out
on that) so it will still lower their cost of capital.

This does give them more flexibility on financing decisions and it will
increase GAAP profit because Apple has been conservative and has been booking
deferred taxes until now.

------
matt_wulfeck
The question is why was there ever a dilemma in the first place. We were the
only country to tax corporations this way, which made us incredibly
uncompetitive -- but worse kept money from being invested in the US. This is
great news for the USA and bad news for everywhere else in the world that
would have otherwise received the investment. We should be doing everything
possible to bring that money home.

~~~
icebraining
_kept money from being invested in the US_

Not really. Much of the money "kept offshore" is invested in the US[1].
Apple's money, in particular, is managed by their subsidiary in Reno called
Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.

[1]
[https://www.hsgac.senate.gov/subcommittees/investigations/me...](https://www.hsgac.senate.gov/subcommittees/investigations/media/new-
data-show-corporate-offshore-funds-not-trapped-abroad-nearly-half-of-so-
called-offshore-funds-already-in-the-united-states)

~~~
matt_wulfeck
Think for a minute about the circuitous steps Apple must take just to invest
in the United States with overseas revenue. Everyone in the United States
should see this as a huge win.

~~~
davmre
I haven't seen anyone here argue that it's difficult to invest foreign money
in the US. Apple's only complaint is that they couldn't funnel the profits
from such investment back to their US shareholders, without paying taxes.

~~~
valuearb
That’s the point. Being unable to pay profits to shareholders makes your
business very unattractive. If Apple had directly returned its profits every
year, over 60% of their profits would be paid to taxes.

~~~
ac29
Citation on the 60% tax rate?

~~~
valuearb
Foreign corporate income tax, which averages around 8%.

CA Corporafe income tax, 9%.

Federal corporate income tax, 35%.

State personal income tax, 0-12%.

Federal dividend taxes 15-20%.

------
skywhopper
> "Apple owes 35% tax to the federal government on all revenue earned"

Tax is assessed on income, not revenue. It's an important distinction. Apple
had 52.6 billion in revenue, and 10.7 billion in income.

~~~
elephant_burger
Yeah that sounded odd to me.

------
ksec
Excuse my completely naive and ignorant views and questions.

Moral issues aside, do they _have to_ bring it back to US? I dont see what's
wrong with it sitting there doing nothing.

Are there no other way to invest the $250B cash generating 2% yearly interest?
i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )

Why is it every call to maximize _only_ shareholders value? Could they not
provide more value in their product or product line up with those additional
Interest from Cash? Investing into better after sales services particular in
South East Asia Region?

Apple could provide iPhone as a Services, much like iPhone upgrade program in
the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic,
and with top up like Apple Music and future Apple TV. Making Apple being the
actual creditor themselves, that needs lots of cash.

As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier.
There are lots of people in the world without Credit Card or dont want
themselves associate with credit cards, which is different to US. And prefer
to have Mobile Billing, a monthly payment. These people also failed to get
iCloud backup, which is increasing dangerous as we put more important things
in our phone. Apple could finally offer Visual Voicemail, and free iCloud
Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music,
Carrier Services, All under one monthly fees.

There are lots of thing to help and improve, invest to bring more value and
future returns, dividends is ok, but share buy back to me seems dump. This is
speaking from a long time $AAPL investor.

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nathan_long
> Given Apple’s current balance sheet strategy and assuming no change to the
> U.S. corporate tax code, the company is on track to soon have $300 billion
> of cash, almost all of which is located abroad, and $150 billion of debt.

I don't understand business. If I owed $15,000 and had $30,000 in the bank,
I'd pay off my debt. Why is this different?

~~~
unk
It may be better to invest that money if the rate of return is higher than the
interest on their debt.

~~~
ryandrake
Good luck finding a guaranteed rate of return higher than the interest rate on
any of your debt. Most credit cards are >10%. Even on the low end, if, say, my
mortgage was 4% and I had the cash to pay it off, it would certainly make
sense to do it. It would only make sense not to if I could find an investment
that paid over 4% guaranteed. Such an investment does not exist, period. (If
it does, please let me know and I will put all my money into it).

~~~
kondro
LOL… Apple does NOT pay 4% on its debt. It's effective combined interest is
2.38%.

In my naive back-of-the-envelope calculations, it would have to hold this debt
in a non-tax-effective way for more than a decade to be worse off with this
debt versus repatriation. An in the meantime it can use the interest it pays
in the USA to offset it's US tax bill for income earned in the USA making this
effectively a lot longer.

The long-term average for the S&P500 is 12.11%… not to mention the fact that
Apple can probably make better use of its money by investing in itself, rather
than passively on the stock market.

All round, no matter your actual moral and ethical opinions on the matter,
this is the smartest financial decision Apple can make (and they probably
spend tens of millions a year on advice, legals and research to prove this).

And as much as Apple goes on about them being a California company… they're
mostly a multi-national with much of their money being earned and spent
outside of the USA.

~~~
ryandrake
Right--I was just responding to the parent's post to the grandparent's
comparison to personal debt.

------
blueprint
> One fear that investors have with companies holding excess cash is that
> future management teams will waste the cash on frivolous M&A and other
> questionable investments. This results in the value of the cash being
> discounted, leading to a lower stock valuation.

Great example of why I maintain that price != value. The former is an
objective metric while the latter is probably subjective to a problem,
context, application, etc..

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gman83
> Instead of using M&A to buy revenue or users, which is a disastrous strategy
> in Silicon Valley, Apple looks to fill asset holes in terms of technology
> and talent.

Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a
disastrous strategy.

~~~
astrodust
For every smart buy like YouTube there's been dozens of utter failures.
MySpace. Netscape. Flickr. Softimage.

It's to the point where being acquired is the kiss of death for most start-
ups. Sure, you get your exit, but your product is toast.

Apple has a very _particular_ culture and it's difficult for other companies
to integrate into that. Google was more accommodating, like with Nest, but
even then they realized they had to restructure and make Alphabet for it to
actually work.

Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled
it.

~~~
lukestevens
Motorola too!

~~~
astrodust
It's quite a list, isn't it? Sony's aquisition of Ericsson, Microsoft of
Nokia's phone business, which like Danger did not end well.

------
leoh
It's insane that corporations are taxed less than individuals abroad. If you
live abroad and work - you pay income tax, whether that money is repatriated
or not.

~~~
Thiez
That is the case for a handful of countries, the US among them. In the vast
majority of countries you don't have to pay income taxes when you live and
work abroad. Of course you still pay such taxes in the country where you live
and work.

------
maxehmookau
I wonder what $80b in extra tax receipts could do for American education,
healthcare or social mobility.

Ah well, at least Apple shareholders get a few more dollars.

~~~
mempko
Sad thing is we don't need the tax receipts to pay for those things. Its a
political problem , not a fiscal one .

~~~
maxehmookau
That may be true, but the political problem is one where American politicians
put low taxation above almost all social issues.

Having the political will to collect that money is the first step to
correcting the political problem you refer to.

~~~
MaysonL
Orrin Hatch, after voting for a trillion-dollar tax cut, said there wasn't any
money for CHIP.

------
thebiglebrewski
How could one profit off of this? Buy Apple stock now?

~~~
adamw2k
That assumes some of this isn't baked into the price already. But yes, if you
think the market hasn't factored in any one or more of these potential
actions, then buying the stock would be the most logical way to profit...

~~~
lisper
> if you think the market hasn't factored in any one or more of these
> potential actions

And if you believe that, I have a bridge you might be interested in buying.

~~~
EliRivers
The market does seem to be frequently bad at that sort of thing. I've done
pretty well (better than my index funds) over the years by reading the news
and buying shares in companies that seem to have more wealthy futures. I very
rarely sell so I can see how they've done over many years and, by and large,
pretty well.

Maybe everyone assumes that the market has already factored it all in so they
don't bother buying so it isn't factored in because the increased demand never
arose. Maybe I'm just out of sync, and as other people start to notice this
they'll start buying and it'll turn back around and then the market _will_
have factored these things in because lots of people assume it hasn't.

~~~
icebraining
Or maybe you got lucky. Not saying you did, but how would you tell the
difference?

~~~
lisper
This. If you throw darts at the stock page you have a 50% chance of beating
the market.

~~~
EliRivers
I have thrown a dozen or so darts, and my rate seems to be around 80%. But
then, I'm not just throwing darts; I'm reading that companies are going to do
better in the future and will see a rise in stock price, and it makes sense,
so I sometimes buy them. Maybe I'm just the lucky one. I started with ARM a
good eight years ago, when I read that they were going to do really well by
supplying Apple. Of course, if I'd done the same thing with Imagination
technologies 8 years ago, it would have been a less happy ending; I can only
assume that the news I read at the time was more effusive about ARM.

Most recently (13 months ago - this isn't a regular thing), a British pasty
retail outfit named Greggs. The news said things were looking good, I could
see their stores were busy, I bought some shares, they're up about 40% in 13
months (which is unusually good, I freely admit, and I certainly didn't expect
that). That's really all I do, and it seems to work out (and it really is rare
when I do; typically, I just dump all my pennies into index funds - easily 80%
of my pennies are in index funds). I think some of the big name successful
investors do something similar, but obviously on a much grander and more
informed scale. Plus the British house-builders. Every time the UK government
announces another plan to help young people get fifty year mortgages, it's
time to buy some more of them! They will crash eventually, I'm sure :(

~~~
lisper
> I have thrown a dozen or so darts, and my rate seems to be around 80%.

The odds of that happening by chance are <50% but still quite high, about 6-7%
depending on exactly how you reckon it. So one person in 15 will get this
result purely by chance.

There are studies that show that very few (like <<1%) professional money
managers can beat the market consistently. You may well be one of those rare
people, in which case you could make billions on Wall Street. But until you
amass a much longer track record than you have, the odds are much higher that
you are just one of the lucky ones. There are a lot more lucky people out
there than most people realize.

~~~
Simon_says
Yea, all that's true, but Eli has a significantly easier job. A professional
manager has to make a lot of decisions and still has to invest money even if
they don't have any insightful ideas. On the other hand Eli will only invest
if he gets a good idea, and if not, then no investment.

~~~
lisper
That's no excuse. Eli can always park his undeployed capital in an index fund.
So if he can consistently pick winners 80% of the time he'll still beat the
market even if he has fallow periods.

~~~
Simon_says
Excuse for what? Of course Eli can do that, and it has nothing to do with my
point.

~~~
lisper
Excuse for not taking his (alleged) talent to Wall Street and making billions
of dollars.

> it has nothing to do with my point

which was:

> A professional manager has to make a lot of decisions and still has to
> invest money even if they don't have any insightful ideas.

Implying that Eli's talents could not be deployed on Wall Street because he
could not operate under the constraints on which professional money managers
have to operate. But that's not true.

------
jacksmith21006
Do also remember Apple also has over a $100B of debt which you subtract from
the cash.

~~~
tzakrajs
> the company is on track to soon have $300 billion of cash, almost all of
> which is located abroad, and $150 billion of debt

------
guelo
> This has led Apple, along with other Silicon Valley firms, to keep foreign
> cash offshore as it is the financially prudent thing to do for shareholders.

The kept the cash offshore with the belief that they would eventually be able
to bring it back without paying taxes. They started a multi-year political
lobbying campaign to change the tax system. And it worked. If our political
system was not up for sale they would have eventually had to bring the cash
home and pay their damn taxes.

~~~
marcoperaza
Why should American corporations pay both foreign _and_ US corporate tax on
income made overseas? Almost no other country requires this of their companies
and it's a major competitive disadvantage for American businesses.

\------------------------------------------------

Edit: I'm rate-limited, but in response to below I'll reproduce what I've
posted in prior discussions about this:

We’re really better off eliminating the corporate tax altogether. It’s a
pretty small portion of tax revenue and the only reason it exists is to be a
plank for politicians who want to tax the "greedy corporations." All corporate
income is either paid as dividends, paid as salaries, or reinvested. When it
is paid as dividends, it is taxed as capital gains. When it is paid as
salaries, it is taxed as income. When it is reinvested, it is either lost, or
eventually becomes income and capital gains. There is no need to have another
layer of taxation that just makes a giant accounting mess and creates all
sorts of ridiculous incentives to use tax shelters.

~~~
gamblor956
_Why should American corporations pay both foreign and US corporate tax on
income made overseas?_

They don't. They pay the highest rate in either jurisdiction, so either the US
or the foreign rate. In the US, they get a tax credit for the amount of taxes
paid to a foreign tax authority so that they are never double-taxed on their
corporate income. Note that every country in the world of significant economic
size taxes corporate income.

Dividends are taxed twice, as corporate profits and again when received by the
shareholders as dividends, but they should be. Dividend taxes are the price
shareholders pay for getting limited liability and all sorts of government
protections and incentives.

~~~
marcoperaza
> _Dividend taxes are the price shareholders pay for getting limited liability
> and all sorts of government protections and incentives._

We provide for limited liability because we think it is beneficial to society
in encouraging investment and risk-taking; it is not a sacrifice or expense we
expect compensation for.

~~~
cbzbc
It's both/and, there are costs associated both with the laws around llcs and
providing the need to play the of liability holder of last resort in certain
circumstances.

