Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16
Gold Price, Mining Stocks Rocket Higher - 5th Feb 16
Crude Oil Price Bottoms and Blues - 5th Feb 16
Gold and Silver: Ripe for a Recovery! China May well Change the Game - 5th Feb 16
How Pension Plans are Responding to Financial Repression - 5th Feb 16
Senior Gold Producer Goldcorp Takes Large Stake in Nevada's Gold Standard Ventures - 5th Feb 16
Tips for Smart Oil and Natural Gas Investing 2016 - 5th Feb 16
Another Corporate Giant Is Leaving the U.S. – What This Means for You - 4th Feb 16
TPP is Economic Warfare, Trade Can Make Everyone Worse Off / Governments are Stupid - 4th Feb 16
Gold and Stock Markets Inflection Points Galore - 4th Feb 16
Putin Cries Dyadya (Uncle), Is Saudi Arabia Listening? - 4th Feb 16
Gold Price Golden Bottom? Video - 4th Feb 16
Look North for Value-Priced Growth in Healthcare Biotech Stocks - 4th Feb 16 - TLSReport
BrExit EU Referendum - Britain's FINAL Chance for Freedom From Emerging European Superstate - 4th Feb 16
HUI Now Confirming Gold Price Move Higher - 4th Feb 16
Crude Oil Price Forecast 2016 As Good As It Gets - 4th Feb 16
Gold and Silver More 'Flight To Safety' Active February - 3rd Feb 16
Raytheon Company: A Defensive Stock for a Defensive Market - 3rd Feb 16
Is Silver Really a Weak Link - 3rd Feb 16
Gold to Beat Stocks 2016? - 3rd Feb 16
David Chamberlain Cameron, Britain's Last Chance for Freedom From Emerging European Super State - 3rd Feb 16
EU UK Draft or Daft Agreement By Donald Tusk to Members of the European Council in Full - 2nd Feb 16
Europe: Why It's Going to Get a Lot Worse Before It Gets Better - 2nd Feb 16
The Next Generational Bust Is Coming, Stock Market 70% Collapse - 2nd Feb 16
The Coming Stock Market Decline May be a Monster - 2nd Feb 16
S&P 500 Has Likely Entered a New Bear Phase - 2nd Feb 16
How and Why To Move Your Assets Offshore Before the Financial Collapse - 2nd Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

Corporations Making a Huge Mistake, Destroys More Value Than the Government Ever Could

Companies / Corporate News Nov 16, 2012 - 08:39 AM GMT

By: DailyWealth

Companies

Best Financial Markets Analysis ArticleDan Ferris A few weeks ago, I called Apple...

I spoke to an investor relations person about the company's massive cash hoard. She confirmed Apple has $121.3 billion in cash and securities on its balance sheet... Of that amount, a "substantial portion" of the company's cash is "indefinitely reinvested" in accounts outside the U.S.



Specifically, $82.6 billion of Apple's total cash position is held in foreign accounts.

The story is similar at other big-name blue chips... For years, companies like Microsoft, Cisco, and Johnson & Johnson have kept a large portion of their cash offshore. This strategy allows them to pay lower taxes on their earnings.

It sounds like a good idea. But it's not. A preoccupation with tax rates is hurting shareholders. Let me explain...

At 35%, America has one of the highest corporate tax rates in the world.

This means companies are required, by law, to pay 35% of the income they make to the government. But corporations have found a legal workaround... Businesses that earn big profits in lower-tax countries leave that money overseas, so they pay lower corporate taxes.

Apple, for example, paid a lower effective tax rate in its latest fiscal year of 25% – well below the U.S. corporate rate of 35%.

I realize most shareholders would like the companies they invest in to pay the lowest possible tax rate... That's why many investors don't care much about their companies' massive offshore cash holdings. But they should...

Longtime DailyWealth readers know I'm an enthusiastic supporter of software giant Microsoft. I recognize it's one of the all-time-great creators of shareholder value... Microsoft has compounded shareholder wealth by an average of more than 25% per year since it went public. Few corporations can say the same.

So why is the stock of such a wonderful business trading at such a depressed market valuation?

Right now, the S&P 500 is trading around 16 times earnings. Microsoft trades around 11 times earnings. It should trade at a premium to the market, not a discount. What's going on?

According to the most recent data available, Microsoft has over $60 billion in cash, cash equivalents, and short-term investments. More than 90% of it is sitting idly in accounts outside the U.S. Microsoft would have to pay $19.4 billion in taxes if it were to bring that cash home to the U.S.

You may think shareholders will end up better off if the company doesn't essentially light $19 billion on fire. But Microsoft shareholders should fear bad capital allocation much more than they fear the taxman.

The U.S. taxman won't destroy 100% of the dollars a company brings home. We can't say the same for companies themselves...

I recently spoke with one of Microsoft's investor relations representatives about the $8.5 billion purchase of Luxembourg-based Skype in October 2011. She offered the Skype deal as evidence Microsoft uses offshore money to create shareholder value. Microsoft paid more than three times what eBay paid for Skype not too long ago. Is Skype three times closer to making a net profit? I sure hope so...

That's not the only bad acquisition management has made. In 2007, Microsoft bought out digital marketing and service provider aQuantive. The acquisition cost $6 billion and was recently written down to zero. The money is gone.

Tell me... would you rather own 100% of aQuantive and Skype... or 65% of $14.5 billion? The aQuantive acquisition was essentially a 100% tax on the invested capital. The U.S. government, by contrast, charges just 35%. Who is the bigger threat to your money?

Most people view taxes as bad and corporate mergers and acquisitions (M&A) activity as good. It's silly. It's like saying you'd rather lose your money gambling than have it stolen from you. It doesn't matter who ferried your cash away. It only matters that it's gone.

Piling up cash to avoid paying taxes is a denial of reality. Corporate managers deny reality when they pretend tax efficiency is a priority. And shareholders deny reality when they let management get away with it.

There's really only one solution to the problem: return the excess capital sitting idly on the balance sheet to the owners of the company. Investors are starved for safe, growing income now more than ever.

Microsoft generated over $29 billion of free cash flow last year. It paid out $6.4 billion in cash dividends. It could have paid out triple that amount. Microsoft has enough cash to raise its dividend by 50% immediately. If it instituted a policy of paying out 60% of its free cash flow, I wouldn't be surprised to see shares rise 40%.

My point is simple: Tax efficiency is NOT more important than smart capital allocation. Shareholders should revolt against companies that think it makes sense to play tax games with shareholder money. They should insist the money be brought to the U.S. for distribution to shareholders via dividends or share repurchases.

Good investing,

Dan Ferris
P.S. I recently wrote a letter to Microsoft's board of directors addressing this very issue. If you want to understand how these decisions affect you as a shareholder, it's a must-read. Access it here. And please feel free to forward it to anyone you think might benefit.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2011 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History