The Tax Bill Becomes Real: Cash Repatriation

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 18, 2018 2:37:44 PM

and tagged In the News

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cash repatriationThis morning, the big news was Apple’s announcement that it will bring back what appears to be essentially all of its cash held abroad to U.S. jurisdiction. The immediate impact will be substantial, with Apple saying it will pay $38 billion in taxes. If the remaining U.S. companies with cash overseas were to do the same thing, more than $300 billion would be raised—which would certainly help with the deficit and be good for governmental finances. This is a real benefit of the tax bill.

One and done

The problem is that this is a one-time hit. That is, when companies bring the money back—and pay their (reduced) tax bills—the payment is one and done. There will be some incremental additional revenue in the future, as more foreign revenue will likely be reported as U.S. income, but this will be offset by lower rates overall. In other words, from a governmental finance perspective, we are getting a big hit now but will get less later.

Apple also offers a good look at what that repatriation might mean for the economy as a whole. As part of its announcement, the company stated that it would spend $30 billion in capital investment over the next five years and create more than 20,000 jobs. It also plans to add about $350 billion to the economy over the next five years. All good news.

What’s the effect of new spending in the U.S.?

But there's another problem: it's hard to guess how much of this would have happened anyway. Apple already planned to spend tens of billions of dollars, and it largely does not disclose how and where that spending goes. So, the incremental effect of new spending here in the U.S. is hard to estimate. Moreover, Apple has planned—and can afford—to do that spending with existing cash flows. It doesn't need the money. In fact, that is why it was able to leave the cash abroad for so long.

Other companies, of course, are not in the same strong financial position. But most of the cash abroad is held by companies that are in an equally strong position. Again, this is common sense. If they needed the money, they would have brought it back already. This raises the question of whether the net effects may end up being rather small in the economy as a whole.

What will they do with the money?

Expectations are that much of the cash will be used to either pay dividends to shareholders or buy back shares (in other words, given to the shareholders). Obviously, this will be good for shareholders in the short term. But looking at this situation as a potential buyer of the stock, once that gain is passed, future growth prospects for most companies will not really be affected. Just as with the tax payments, this would be a one-time event and would not change the company’s prospect going forward.

How can investors play this?

Much of the good news is already priced into stocks, especially those that might (like Apple) bring lots of cash back. That upward price adjustment may be behind some of the recent surge in stock prices. In that sense, we probably got much of the benefit already. As more companies announce their plans, of course, that news will also cheer investors and may drive the market even higher.

As for playing at the individual stock level, much depends on what the companies themselves decide to do. So, the individual investor is not really in a position to try and trade off the possibility. Unfortunately, we are best off just enjoying the ride of the market as a whole. Fortunately? There is a real potential benefit there.

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