Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Death of the U.S. Dollar? Gold an Inflation Hedge? Really? - 29th July 14
We’re Ready to Profit in the Coming Gold Price Correction—Are You? - 29th July 14
Their Economy Will Collapse, Including Ours - 29th July 14
Silver Prices – Megaphone Patterns - 29th July 14
Real U.S. Interest Rates - Fed Exit a Blue Pill? - 29th July 14
Why Israel Should NOT Exist, Just Like Any Other Rogue State - 29th July 14
Gold Still Looking Good - 29th July 14
Silver Price Set To Star - 29th July 14
Our Population Growth Totalitarian Future - 29th July 14
World War 1 Cause and Consequences - The Planned Destruction of Christendom - 29th July 14
Will Crashing Commodities Crash the Stock Market? - 29th July 14
Ukraine MH17 - Washington Thinks Americans Are Fools - 29th July 14
Stock Market Bubble Warning - 29th July 14
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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

© 2005-2014 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

Free Report - Financial Markets 2014