Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Stock Market Reluctant Primary Wave IV? - 2nd Aug 15
Power and Compassion - 2nd Aug 15
Preparing for The Stock Market Crash - Inverse ETFs and Puts Timing... - 2nd Aug 15
Commodity Prices Slump Signals Slow Economic Growth Outlook - 2nd Aug 15
BSE Sensex Stocks Bear Market Underway - 2nd Aug 15
What Microsoft’s Dismal Earnings Report Really Tells You - 2nd Aug 15
Gold And Silver Charts Are The Compelling Story. Fundamentals Do Not Apply - 2nd Aug 15
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15
Ibuprofen Warning - The Pain Killer that can Kill You! - 29th July 15
More Ritholtz on Gold, and Another Response - 29th July 15
Crude Oil Price Is Lower – and You’re Richer - 29th July 15
U.S. Home Sales Market Is Dead – This Chart Proves It - 29th July 15
Greece- What Happens When Economists Talk Politics - 29th July 15
The Gold - U.S. House Prices Ratio As A Valuation Indicator - 29th July 15
Will Crude Oil Price Decline Continue? -Video - 28th July 15
Gold & Silver Money Has Devolved Into Debt and Plastic - 28th July 15
Buy and "Own Gold Krugerrands" Says Money Expert Jim Grant, Very Bullish on Gold - 28th July 15
How to Protect Yourself from China's Crashing Stock Market - 28th July 15
Quantum Geopolitics - 28th July 15
Gold Mining Stocks to Weather the Storm - 28th July 15
Stock Market Bulls Beware! - 28th July 15
Will Chinese Stock Market Crash Affect the US? - 27th July 15
Crude Oil Price Under $48! - 27th July 15
Are We Seeing a Trend Reversal with U.S. Interest Rates? - 27th July 15
How to Know When the Gold Bear Market is Over - 27th July 15
Gold Bear Market Phase III - 27th July 15
Silver Bull Hammer Buy Signal - 27th July 15
Gold Cracks Support and Plunges to New Lows - How Low Will Price Go? - 27th July 15
Commodity Markets Breakdown Of 2015 Is Now A Fact - 26th July 15
Gold Price at a Five-Year Low: Here’s What to Do - 26th July 15
Stock Market Primary III Inflection Point - 26th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

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

© 2005-2015 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