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 Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
January 20, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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