Cisco, Apple And Microsoft's Foreign Cash Dilemma

 |  Includes: AAPL, CSCO, MSFT
by: Stephen Rosenman

Multinational corporations have taken advantage of lucrative overseas markets to ramp up their sales. Owing in part to gentler tax treatment outside the U.S., these corporations are piling up extraordinary amounts of cash in their foreign subsidiaries. Increasingly, these export-driven companies face a dilemma: It's costly bringing the loot back home. The U.S. is virtually unique in taxing profits earned elsewhere. While allowing a foreign tax credit, the 35% U.S. rate still poses a challenge: Few multinationals have elected to repatriate their overseas cash.

Apple's Foreign Cash Goes Stratospheric

Apple (NASDAQ:AAPL) has accumulated a whopping $54 billion of its $82 billion offshore. More startling, the company's foreign coffers are increasing three times faster than its U.S. cash, and the trend is accelerating rather than plateauing. While nowhere near starving for capital, Apple's growth potential is more constrained here than offshore simply because capital production is more efficient overseas. Apple's wiser using pre-U.S. tax foreign money to make an investment than using its American cash. For example, it's far easier for Apple to swallow ARM Holdings (NASDAQ:ARMH) than Broadcom (BRCM) although both have similar market capitalizations.

The Apple Take-Away: Cash begets cash. Apple will find its opportunities lie increasingly internationally. Examples: more Asian Apple retail stores, acquisitions outside the U.S., perhaps even a foreign telco company.

Microsoft: Could the Company Need to Borrow to Raise Its Dividend?

Microsoft (NASDAQ:MSFT) is even more lopsided in its cash position: $51 billion of its $57 billion in cash resides frustratingly offshore. In its 10K, the company explains its options to complete significant acquisitions or share repurchases: costly tax repatriations, debt or equity offerings. So far, Microsoft has not touched its foreign cash, opting to borrow $11 billion to fund its discretionary needs. The $51 billion sits tantalizing out of reach without incurring additional taxes. Microsoft may find itself struggling to increase its dividend without either borrowing money or accessing this offshore capital.

The Microsoft Takeaway: The company has been kind to dividend investors. It may have second thoughts about upping the dividend as its U.S. operations can only fund so much.

Cisco: Rich Abroad, A Different Story In The U.S.
Reportedly, when President Obama asked John Chambers how to jump start the economy, Cisco's CEO suggested a tax repatriation holiday on overseas profits.

Indeed, for Cisco (NASDAQ:CSCO), overseas cash is a big deal. Cisco holds a greater share of its money overseas than either Apple or Microsoft: $40.6 billion of its $44.6 billion cash.

Cisco has been quickly accumulating foreign capital: Since 2005, off-shore cash has risen almost four fold. Cisco's approach to its foreign largesse: Hands off. The company meets its financial needs by borrowing money. In 2005, Cisco had no debt. Since, debt has increased to $16 billion. Cisco is a multibillionaire abroad, but here at home, it's hungry for capital.

(from 10Ks)

The Cisco takeaway: Cisco will have to address its foreign cash deluge. U.S. cash doesn't give it enough financial power to make its acquisitions, increase dividends, and run the company. Adding debt has a price. They may be the first to repatriate overseas cash.

Which of these companies will blink and repatriate their overseas cash? For the time being, each states it has no need to do so for the foreseeable future.

Right now, corporate borrowing can be done at low rates. When that changes, there will be more pressure to bring overseas cash home.

In the meantime, Cisco will likely keep borrowing as foreign cash heads toward $50 billion. Microsoft will get very close to being fiscally constrained in the U.S. In a year, maybe two, Microsoft's dividend will likely top as U.S. available dollars get harder to come by.

And Apple? Well, Apple is Apple: It sits on a ton of dough everywhere, even here. Yet, even wealthy Apple has finite stateside resources: Count out bold U.S. ventures or giant dividends from Cook and Company any time soon.

Disclosure: I am long AAPL.