Apple's Shareholders to Reap Tax Windfall -- WSJ
Besides stock buybacks and higher dividends, some expect acquisitions
By Tripp Mickle
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 20, 2018).
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.
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. Of broader benefit to investors, the change in tax law should boost Apple's bottom line by cutting its effective tax rate. It also could prompt the company to ramp up acquisitions and research-and-development spending to reduce its iPhone dependency, an abiding concern of some shareholders.
"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 repatriating overseas cash 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.
The projected $88 billion for investors compares with the 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 was its habit 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, and presumably Apple's share price.
The company has reported an effective tax rate of about 25% over the past three years. But Jennifer Blouin, an accounting professor at the University of Pennsylvania's Wharton School, estimates the current rate is closer to 18%, reflecting 42% for 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.
Not that they haven't had plenty already. Apple's share price has risen 49% over the past year, about double the S&P 500's increase for the period.
Investors also expect Apple to invest some of its repatriated cash in becoming less reliant on the iPhone, which accounts for two-thirds of company revenue. 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 has targeted for growth, such as augmented reality.
Apple has never spent more than $3 billion on an acquisition -- the largest being Beats in 2014 -- but some investors are clamoring for a big deal to accelerate its push into original video. Acquiring 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 [email protected]