Apple’s U.S. shift should lift shares

REPATRIATION

JONATHAN RATNER Like President Donald Trump, wants to “Make America Great Again,” or at least that’s one takeaway from its plan to directly contribute US$350 billion to the U.S. economy over the next five years. But the real beneficiaries will likely be the technology giant’s shareholders.

Apple’s pledge, which includes U.S. capex investments of US$30 billion and plans to create 20,000 U.S. jobs at the company, also detailed a massive tax payment related to overseas profits that will account for about US$75 billion of its direct contribution.

“Apple, already the largest U.S. taxpayer, anticipates repatriation tax payments of approximately US$38 billion as required by recent changes to the tax law,” the company said in a statement on Wednesday. “A payment of that size would likely be the largest of its kind ever made.”

While President Trump hailed this as a “huge win for American workers and the USA” (and of course his administration), Apple shareholders should also be pleased. Much of the cash currently held overseas will probably flow back to them.

“We view this positively and think that almost all of it will be deployed for buybacks and dividends, given Apple’s strong capital structure and very low cost of debt,” said Amit Daryanani, an analyst at RBC.

At a 15.5 per cent tax rate, RBC noted that Apple’s plan implies that it wants to bring back US$245 billion (or US$207 billion after tax) of offshore cash. The company had slightly more than US$250 billion in overseas subsidiaries at the end of the third quarter of 2017.

Apple’s US$30 billion of U.S. capex for the next five years will target data centre investments, add to its existing U.S. employee base of 84,000, and help build a new campus that will be home to its technical support operations.

However, Daryanani thinks this approximately US$6 billion in U.S. spending is already factored into Apple’s US$18 billion capex guidance for fiscal 2018.

It “does not result in a meaningful increase,” the analyst said.

Nonetheless, assuming Apple buys back shares at an average price of US$190, RBC believes this could add roughly US$3 to 2018 earnings per share already forecast to be about US$11.

Other tech stocks rallied on the news, in anticipation that other U.S. companies with large overseas cash piles may follow Apple’s lead. That helped the S&P 500 hit yet another record close above 2,800 on Wednesday, as recent changes to U.S. tax laws continue to fuel the bull market in stocks.

“For all the criticism of President Trump, the nature of his presidency and his economic policies, he appears to have got what he wanted in prompting U.S. companies to reinvest their profits back into the U.S. economy,” said Michael Hewson, chief market analyst at CMC Markets UK.