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Apple's Foreign Cash Hoard

Jan. 11, 2012 7:14 AM ETApple Inc. (AAPL)17 Comments
Stephen Rosenman profile picture
Stephen Rosenman

Apple (NASDAQ:AAPL) is piling up boatloads of cash: just not here.

Those boatloads are increasing becoming docked in Apple's foreign subsidiaries and cannot be repatriated without incurring additional hefty U.S. taxes. A whopping $54 billion of Apple's $82 billion cash and investments is in offshore accounts. It isn't coming here: The giant 35% U.S. corporate tax has created an artificial divide between U.S. and foreign holdings, a divide which cannot be easily bridged.

Moreover, the off-shore component of cash is growing exponentially, courtesy of milder overseas tax treatment as well as burgeoning foreign markets. In contrast, Apple's U.S. cash/investments are increasing much more slowly.

The graph below charts Apple's cash, short and long term investments held at U.S. and foreign subsidiaries.

(Data from Apple 10Ks)

The foreign contribution to Apple's cash and investments is growing at far faster pace than the U.S.

(Data from Apple 10Ks)

Increasingly, Apple's cash lies overseas out of easy reach, a trend that will pose a considerable challenge for the company in instituting a significant dividend, buyback, or U.S. acquisition. For the foreseeable future, Apple's foreign wealth will keep getting larger: Ultimately, Apple may become more of an overseas business with a U.S. division hindered from a lack of ready cash.

Disclosure: I am long AAPL.

This article was written by

Stephen Rosenman profile picture
Stephen Rosenman enjoys analyzing the financial health of companies and pointing out areas the market is either not recognizing or ignoring. A long time investor, I put my money where my mouth is. That's why I'm passionate about my positions. I trumpet companies I believe in and back my articles up with data and graphs. Every now and then, I'll write something a little goofy to lighten it up...

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Comments (17)

M.Makoni profile picture
Interesting observation, but I think the bigger issue here has been neglected; what Apple actually plans to do with the cash. The cash hoard has been growing and it's now apparent that Jobs and the current management really had no clue what to do with their good fortune. We've got to realize this kind of cash is new territory to Apple's management. Only time will tell if anything good comes out of it, but I believe the company is excessively cautious and the longer they hang on to the cash the more likely they will do something really stupid with it. They did purchase Anobit the small Israeli company recently... but ineptitude stills rules.
The Mad Hedge Fund Trader profile picture
Apple has become a monster cash flow generator. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time.
Apple announced net profits of $13.06 billion, or $13.87 per share, up 11% from the previous year. If the company just maintains that rate for the rest of the year, it will generate $55.48 in earnings, which at the current 11.5 multiple should take the stock up to $638, up 40%. If Apple makes it up to a market multiple, the stock should rise to $721, a gain from here of 58%.

If the multiple expands to its pre-crash average of 35 X, that would take the stock to a positively nose bleeding $1,941, giving you a 424% return from current levels. Then the company would be worth $2.8 trillion and rank 5th in the world in GDP, more than France, and just behind Germany. Wow!
It all reinforces my view that Apple shares will reach my long term target of $1,000 sooner than anyone thinks. Long term readers are well aware that I have been making this call for the past two years back when it was trading at a lowly $240. More recent subscribers will also recall that I predicted that Apple would be the top performing technology stock in my 2012 Annual Asset Class Review.
I'm not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market. _

The Mad Hedge Fund Trader
What an asinine suggestion! Congress has done quite enough to drive business out of the USA without threatening revocation of corporate charters. Every successful global US corporation will up sticks and get listed where it can run its business without political interference.

LSE listing for AAPL, anyone? Bit chunky for Singapore or Hong Kong....
InvestTerm profile picture
This is stupid. The congress should threaten to revoke the corporate charter of any company that accumulates more than 10% of their paid in equity as cash. They're special purpose organizations that ought not accumulate huge mountains of cash around the world.

If we didn't have two corporate political parties dedicated to the aggrandizement of the egos of a select few individuals this would be illegal. Occupy wall street? Maybe start by occupying Cupertino.
The companies would simply cease to be US companies. The the US would get even less.

Try it.

If fact if the US tax system doesn't get competative real soon, this is likely to happen anyway.

Perhaps congress should threaten to revoke your citizenship unless you pay 30% more tax than is required by law. Why should you be treated differently?

If you post your address, we could come round and occupy your kitchen and gripe about hot little tax you pay.
KenC profile picture
The potential tax bill is not as onerous as most articles addressing Apple's foreign cash would have you believe.

Okay, it’s no secret that roughly 2/3rds of Apple’s cash is held by overseas subsidiaries. According to a couple reports on taxes, it appears that Apple pays 31% on its US-earned income, one of the highest in the S&P500. Since Apple’s net tax rate is 24%, which you can look up in its financials, and since we know 1/3rd of Apple’s profits are made in the US and 2/3rds is made overseas, then we can easily figure out that Apple PAYS 21% on its foreign-earned income. Do the math:

31% on 1/3rd, plus, 21% on 2/3rds, equals 24% on the total.

What that implies is that if Apple were to repatriate its foreign-earned income that it already has paid roughly 21% on, it would have to pay about 10% more to the IRS.

If Apple has paid 21% for foreign taxes on that $54B in cash, that implies a gross income of $68.5B, and $14.5B paid in taxes, leaving about $54B.

31% on that $65.8B is $21.2B. The difference of $21.2B and $14.5B is $6.7B.

So, when articles mention the US corporate tax rate of 35% and put that next to Apple's foreign cash hoard of $54B, it implies a huge US tax bill. In my estimation, that bill is not nearly so large, as it might only be about $6.7B. A big number to be sure, but not quite so large as these stories imply.
I am constantly amazed at the vigor of people who insist that a dividend makes sense. If Apple issues a $12 B dividend, the cash stockpile would drop by $12 B (or, they'd take on $12 B in debt - which amounts to the same thing in terms of the balance sheet). So, the value of the stock would drop by $12 B. There is absolutely no net gain to the shareholder.

As for the rest of the story, it's not as big a problem as you might imagine. Apple could repatriate the cash over time by adjusting transfer prices marginally. You have to be careful, but it's not that hard. The problem is that doing so would increase the profits in the U.S. which is one of the most highly taxed (corporate) countries in the world. So Apple could either bring the cash back directly - and pay taxes. Or they could adjust transfer prices which would eventually bring the cash back - and pay taxes.

The problem is not the cash, that's simply the symptom. The problem is that U.S. tax rates are not competitive, so it is advantageous to generate a larger portion of your profits in other countries.
Roger Mercer profile picture
Thank you, Stustanton. You are exactly right on!
Michael Dance profile picture
The lack of on-shore cash should not pose a major issue as it can be overcome in various ways. First, a dividend yield of say 3% would cost around $12 billion in cash (the actual dividend should they initiate this would be approx that level). Evidence suggests that Apple has sufficient funds onshore to cover this however I do not feel that depleting that cash would be the best option in these times and would recommend Apple borrow cash to pay part of the dividend. This would have the additional advantage of optimising their cost of capital as the company could borrow very, very cheaply and has no debt (it is arguably the best rated corporate credit in the world). An ancillary benefit would be to force the Federal Govt. to revisit their current stance on taxation of repatriated funds which is not terribly sensible from a US perspective (a moratorium would be a good start and it should be possible to engineer bi-partisan support for this). This would be an aggressive approach so a more emollient tax-driven solution would involve the creation of a Newco (Subsidiary) in a favourable offshore (tax) jurisdiction (Cayman?) and give all existing shareholders a pro rata share in that Company which would pay the dividends using the offshore cash (i.e. before Uncle Sam gets his hands on it)
Stustanton profile picture
How do you manage your money if you have billions to manage? The answer is, very carefully. It's important to match the complexity of the environment you exist in. The gain from holding wealth overseas while the dollar shrinks itself makes holding equity overseas wise. But I doubt that currency markets had so much to do with it as did the business of doing business in a global world. Of course Apple is an overseas business with a U.S. division. Duh...? What else could you be thinking? That makes me wonder where you think Apple's money is invested? They are invested in support of technology that Apple is needing for it's future; that apple needs to develop; that Apple needs invented or reinvented. Some of those investments will turn into freight trains, and only Apple knows precisely which those are. That's exponentially leveraging Steve Jobs' so-called "unfair advantage". People who complain about where Apple has it's money are people with personal agendas that don't match Apple's agenda. What's clearing missing in Apple's cash spread is any indication that it is postured to waste its position by giving it away as a dividend. Come on; you either believe in Apple or your don't. It's a disruptive technology company structured as an equity growth machine, not a manufacturing cash cow. Figure it out.
Mac Daddy profile picture
Apple, and other companies with large overseas cash balances have dangled before the government the promise to build infrastructure over here were they allowed to bring that cash home at some sort of a tax discount. I think it is clear that the loss of manufacturing jobs in this country has contributed to our labor problems, so this idea should have some appeal. In order for it to becoem reality, however, the government will also need to fix the onerous permitting process that must be undertaken by any company wishing to build a factory here. The headaches involved in getting such clearance are as much a reason for our companies having outsourced their manufacturing as is the less-costly labor to be found overseas. I agree however that shareholders should not expect anything like the $5 per share dividend that some analysts have written about until the issue of tax amnesty is resolved.
"however, the government will also need to fix the onerous permitting process that must be undertaken by any company wishing to build a factory here."

Funny, that doesn't seem to be stopping at all the Japanese and Korean auto makers from building huge manufacturing facilities here.
And does it occur to you that they may be seeing the other side of the coin by using their international cash to do so at a tax advantage?
drbuilder profile picture
$28 billion is a lack of ready cash? Apple's US cash outpaces most other companies'. Do some homework before making a statement like that.
This info is more interesting than useful, but thanks for the effort.

(Zacks Investments will probably find a way to make it an Apple apocolypse!)

I'm not sure what the implications are here, especially in a time when we're hearing a lot of noise about an offshore profit repatriation tax holiday, but to the entity 'Apple', it seems irrelevant to operations. Not to shareholders, but to operations. It can still be employed for inventory, acquisitions, supply chain, etc. and all of these have an impact on domestic operations. I don't think having $100+ billion can ever be called a 'risk', unless that risk is dying while cackling wildly on the way to the bank to make deposits or something.
In case you haven't noticed, this is the story across most global corporations. Half of all S&P 500 sales now come from outside US. The other day, some guy on CNBC was touting US Corporate Profits at all time high vs. GDP. It's amazing to hear such useless metrics. Corporate Profits are generated globally, while GDP is a domestic figure. That guy needs to call Apple and check that for every 100 new heads Apple adds to its headcount outside US (even pay differentials wouldn't adjust for the headcount differential), how many are added locally. He'll get his answer.
"... with a U.S. division hindered from a lack of ready cash."

And Brazil might suffer from lack of non export coffee causing a short squeeze in the local coffee market.

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