- Apple has over $231B in Cash, of which $214.8B was outside the United States.
- Both the US presidential candidates have been talking of tax breaks for cash repatriation.
- Using a 10% tax rate for repatriation Apple could repatriate nearly $193.3B cash.
A long-time topic of debate in various investor circles has been the gigantic cash pile American multinationals have stashed up in offshore tax havens. American technology companies lead the pack of companies using offshore tax havens and accounting shenanigans to reduce their tax bill to uncle sam. The amount of cash stashed overseas has reached an eye-popping $2.4 trillion. The chart below indicates the pace at which this cash pile has grown over the last decade.
With Apple accounting for nearly a tenth of that, it is no surprise that the company's cash pile has been at the centre of various discussions.
Apple's Overseas Cashpile Crosses $200B
During their recent Q3 earnings call, Apple reported $231.5B in cash and marketable securities with 93% of this being held outside the United States. Quoting Luca Maestri, CFO of Apple, from the latest earnings call:
"Let me now turn to our cash position. We ended the quarter with $231.5 billion in cash plus marketable securities, a sequential decrease of $1.4 billion. $214.8 billion of this cash, or 93% of the total, was outside the United States."
With Apple accounting for the largest chunk of profits stored overseas, it is no surprise Tim Cook, Apple CEO and Donald Trump agree on at least one thing: Corporate tax. Donald Trump is proposing a 10% tax rate to repatriate overseas cash, and Tim Cook suddenly has billions of reasons to raise cash for the GOP.
Presidential Elections Focussing In On Overseas Cash Repatriation
Donald Trump, the republican candidate, has gone on record backing cash repatriation at a 10% tax rate. This is one thing the Republican presidential candidate has, surprisingly, been clear about. While the republican candidate has criticised the various policy reforms his democratic opponent Hillary Clinton, it would be unfair to say she thinks differently on Cash Repatriation. With Hillary hinting at a cash repatriation tax break for corporates, it would be fair to assume that the upcoming election could turn out to be a win-win for American multinationals, as far as cash repatriation is concerned.
Going back over the last 15 years, there have been a few instances of the US Congress discussing a tax repatriation holiday. In 2004, the US Congress brought into effect a tax repatriation holiday under which firms could repatriate cash at a discounted tax rate of 5.25%. In 2009, a second repatriation tax holiday was defeated in the US Senate. President Obama also proposed a 14% tax on offshore cash in his budget 2016, which was again voted down by the senate.
With the above backgraound, it would be fair to assume that Hillary clinton, as a democrat, would be tilting towards a tax repatriation holiday.
Apple ex-cash valuation
Let's now understand the impact of the discounted repatriation tax on Apple. Considering that Apple had $214.8B in offshore cash and $16.2B in the US, Apple could repatriate $193.3B at a 10% tax and $184.7B at a 14% tax. Apple stock closed the last trading session (on August 10) at a price of $108/share, implying a market capitalisation of $584.3B. Based on the latest Q3 earnings release, the trailing twelve month (TTM) net income stood at $47.8B, which gives Apple stock a a PE of 12.2. This compares against the company's 5 year average PE ratio of 13.7.
Using the higher repatriation tax rate of 14%, the net repatriated cash will be $184.7B. This in addition to cash in the US puts the total cash that will be available to Apple at $200.9B. This gives us an ex-cash PE of 8.02, a multiple which is unheard of in the technology space. This leads me to believe that the market is currently discounting Apple's huge overseas cash hoard.
In conclusion, the market seems to be discounting Apple's overseas cash, going by the company's ex-cash valuation, adjusted for a 14% repatriation tax. As a corollary, any positive news on the repatriation front could lead to an upside in Apple stock price.