Much has been made of Apple's (AAPL) valuation, business prospects and cash hoard here on Seeking Alpha and other financial news websites. I'm not here to rehash the valuation argument that has been beaten to death over the past few months, rather, I intend to take a look at Apple's cash balances, where they are located, repatriation taxes that could be due and what it all means for the dividend and buybacks.
We all know that Apple began paying a reasonably sized quarterly dividend in the not-so-distant past in a landmark move for CEO Tim Cook. However, it has done little to nothing to buoy the stock as shares have been hammered since hitting its high of $705 last year. At the current dividend payment of $2.65 per quarter, Apple is paying right at $10 billion per year in dividend payments. In addition, the company has (so far) committed to a laughable $10 billion share repurchase program that runs until 2015. These numbers pale in comparison to Apple's mighty $137 billion cash and equivalents hoard (as of the end of calendar 2012) and its cash generation abilities. However, we must examine where Apple's cash is stored and how much of it is being produced in the US to pay for the share repurchases and dividends before we can assume that Apple can afford whatever it wants.
According to the most recent 10-Q, $94.2 billion of Apple's $137.1 billion cash and equivalents balance is held overseas. This is good for a whopping 69% of the total amount of cash and securities the company owns. This wouldn't present a problem except that if Apple ever tries to repatriate that cash, that is, to bring it back to the US, it will owe income taxes on it to the US Treasury. It is impossible to know exactly what tax rate may be effective for Apple during such an event but we can use Apple's fairly steady effective rate of about 26% as a guide. If that holds, Apple will owe something like $24 billion in additional taxes, should it repatriate all $94.2 billion at once. Of course, I don't think that will happen but you never know.
Now, since repatriation is a very distant possibility due to the enormous amount of taxes that would be owed, I think it's fair to assume that anything Apple does with its shares and business in the US will need to be done with existing US cash and equivalents and cash flows. Since we know that $94.2 of the $137.1 billion is held overseas, we can infer that the $42.9 billion left over is held here in the good old US of A. While $42.9 billion is still an enormous, overwhelming amount of cash, it is dwarfed by the headline number of $137.1 billion.
As far as cash flows in the US, Apple doesn't break down its statement of cash flows down in its 10-Qs but it does provide revenue and operating income for each geographic region. Therefore, we can extrapolate how much cash the US portion of the business is generating and figure out how much money Apple really has the ability to spend each year assuming repatriation is not a possibility at this point. By my calculations, the "Americas" segment makes up about 43% of operating income for Apple. It gets a bit messy because that segment includes North and South America. However, we can assume the bulk of it is the US; 35% seems reasonable enough. We know from Apple's 2012 10-K that the company produced $55 billion in operating income and from my assumptions, that would equate to something like $19.3 billion in the US. We also know that Apple produced $50.9 billion in operating cash flows last year so we can determine from this number that roughly 91% of Apple's operating income is turned into operating cash flows. This means my estimate for Apple's US cash flows for last year is $17.6 billion.
With flat-to-down earnings estimates for this year, it's fair to assume that Apple will produce similar operating income and operating cash flows as last year or perhaps a bit less. Based on these assumptions and assuming perhaps a 5% decrease in income and cash flows, we can extrapolate that Apple will produce something like $16.7 billion in operating cash flows in the US in FY 2013. Before we go any further, please keep in mind that all of my numbers are based on educated guesses and as such, have almost no likelihood of being 100% correct. However, I believe the numbers are probably close enough to reality to warrant their use in a discussion.
The point of this whole discussion is to try and figure exactly how much money Apple can afford to spend on its share-based activities. We know that the share repurchase program is currently $10 billion between now and 2015 and that Apple is currently paying roughly $10 billion annually for its cash dividend. Let's assume the share repurchases are spread evenly over the three years and that Apple doesn't raise its dividend this week during its earnings report. This means that Apple is paying something like $13.3 billion per year out of my estimated US after-tax cash flows of $16.7 billion. This implies that there is very little margin of safety in Apple's current capital allocation plan. Now, Apple does have $42.9 billion in cash sitting in its US bank accounts, which could fund the entire share-based expenditures the company currently commits to for over three years by itself. This is important but we all know how reluctant Apple is to actually spend its cash.
Based on this information and the fact that Apple, or any other company with offshore cash holdings, will be reluctant to repatriate its cash, I think the chance for a massive dividend increase this week or in the near future is pretty slim. I am basing this outlook on Apple's reluctance to spend its cash hoard and the fact that, by my calculations, Apple doesn't have a huge margin of safety in the amount of US cash that is generated each year to pay the dividend and buy back shares.
It isn't like Apple is going to cut the dividend or something but unless the company intends to drastically change its cash management habits, I just don't see repatriation or payouts from currently available cash and equivalents as likely. Therefore, please temper your expectations of a monumental announcement regarding the dividend and/or share repurchases from the Cupertino giant. I could very well be wrong but it would take a fundamental shift in the way Apple manages its cash and indeed, its shareholders. Apple management is famous for giving shareholders the proverbial "finger" and I don't think that is going to change under Cook; he seems just as eager to ignore shareholders as his predecessor was.