Of all the companies set to gain from the recently enacted tax overhaul, the most obvious example is Apple Inc. (NASDAQ: AAPL). With a hoard of $252 billion stashed abroad (and growing) the iPhone maker and its investors stand to benefit the most from this windfall.
The changes to U.S. tax law immediately sent the rumor mill into high gear and all eyes are now turning to Apple to see what the company will do with all its excess cash. At least one analyst thinks Apple will significantly increase its share repurchases, even going so far as to say that the buybacks should "limit any potential stock downside" for the stock.
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Apple cash -- unleashed!
Recent enacted legislation will impose a one-time tax rate of 15.5% on corporations to repatriate profits earned overseas, sidestepping the previous 35% rate. If Apple decides to bring the entire war chest home -- which is unlikely -- the company would incur a tax liability just north of $39 billion, leaving the company with nearly $213 billion to spend.
It is perfectly reasonable to assume that Apple will continue its pattern of share buybacks, especially considering the company's impressive focus on returning shareholder capital. Over the last five years, the company has repurchased $166 billion in stock and reduced its outstanding share count by 20%. Apple has also paid out a cool $61 billion in dividends during that same period.
Burning a hole in their pocket?
Analyst Steven Milunovich of UBS believes there is "the potential that Apple could buy 14% of the company." This assumes Apple will maintain a balance of about $90 billion in cash and increase its repurchase rate from 7% per year from the 5% it bought back in 2017.
It is likely that Apple won't spend the entire $213 billion on buybacks. The company has racked up $116 billion in total debt to fund its capital return programs, so it could potentially pay that down some -- though it does have extremely favorable interest rates.
The company will also likely continue to increase its dividend. Since its reinstatement in 2012, Apple has boosted its payout by a total of 66%, with the most recent increase of 10.5% occurring in May 2017. Apple will probably increase the dividend again in May, as it has done in each of the last six years. Since the company is only spending 26% of its profits to fund the payouts, investors can look forward to additional increases going forward.
Apple could also issue a one-time special dividend. When the last repatriation tax holiday occurred in 2004, U.S. companies increased their dividends to between $0.60 and $0.92 per share for every dollar they repatriated. Additionally, the number of special dividends paid tripled between 2003 and 2004.
Analysts Jim Suva and Asiya Merchant of Citi recently posited that the repatriation of cash will result in a major acquisition by the iPhone maker, identifying Netflix, Inc. (NASDAQ: NFLX) as the most likely takeout candidate. They believe that the streaming video pioneer will help jump-start Apple's own ambitions in the streaming market. Personally, I think that's a little far-fetched and I'm not alone in that.
All speculation and conjecture
The fact is that we have no idea exactly what Apple will do with the repatriated cash. The company has shown a great deal of fiscal discipline in the past, so I doubt that will change.
When asked last year about the potential for a tax holiday, Apple CEO Tim Cook said "I think that's very good for the country and good for Apple. What we would do with it, let's wait and see exactly what it is."
Apple typically updates shareholders on its capital allocation plans in March of each year, so we will probably have to wait until then to know for sure.
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Danny Vena owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.