After Donald Trump’s recent overhaul of the United States tax code, Apple has announced that it will repatriate much of its overseas cash, incurring a $38 billion tax bill. The repatriation will also improve analyst cash flow projections and very likely increase Apple’s stock price.
Apple conducts most of it’s operations, in a legal sense, in Ireland. The reason for this is Ireland’s very low tax rate, keeping much of the cash on Apple’s balance sheet. However, there are a few problems with this. Without bringing the cash back to the United States, Apple cannot use it as capital expenditures to create jobs in the United States. This has brought Apple’s management under fire in the past. From a financial perspective, not repatriating the cash has little effect, other than the loss of the growth opportunity from no reinvestment of the cash.
Analysts would take into account the fact that Apple would have to pay a portion of the cash as tax, and so that portion would not be accessible to shareholders. However, the change in the tax code does, in fact, have an effect.
Not only does it reduce this portion of Apple’s offshore ta cash that has to be paid, but it also stipulates that Apple has 8 years to pay the tax bill. This will drive up analyst estimates of free cash flows.
It is important to note that this repatriation tax, which for Apple is $38 billion, is payable over 8 years and is interest free. Obviously, that means that the upfront payments are going to be very small, with analysts expecting that Apple will only pay $3 billion of it in the first year. Since the bill is interest free, the time value of money will significantly reduce the effect of the tax.
According to gurufocus.com, Apple’s WACC (Weighted Average Cost of Capital) is 9.62%. Assuming that Apple pays $4.75 billion each year, the actual present value of the repatriation tax is only $25.65 billion.
Without getting political, this is one of the reasons why Trump’s new tax plan is not going to work. One of the ideas behind the tax plan was for the new repatriation taxes to offset the losses of the tax cuts for individuals and businesses across the board.
According to estimates, the current loss from the tax cuts are going to be $135.7 billion, while estimates for this year’s repatriation taxes are only at $78.6 billion. That is just over half of what is needed to offset the losses.
While this may be bad news for the United States, this is definitely good news for Apple who are struggling amid recent bad news about the slowing down of iPhones, and the looming HomePod launch.