Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Here’s Why Turkey Can’t Stay Out Of Syria - 25th Sep 17
Hidden Gems Shows A Foreboding Stock Market Future - 25th Sep 17
10 Reason You Should Use Ridesharing To Save Money - 25th Sep 17
Commodities King Gartman Says Gold Soon Reach $1,400 As Drums of War Grow Louder - 25th Sep 17
Stock Market Mixed Expectations, Will Stocks Continue Higher? - 25th Sep 17
22 charts and 52 questions that will make you Buy Gold - 25th Sep 17
Speculation Favors Overall Higher Silver Prices - 25th Sep 17
The Advertising Breakthrough Revolutionizing Gaming - 25th Sep 17
Stock Market Forming a Reluctant Top - 25th Sep 17
Grid Forex Strategy - All You Need to Know - 25th Sep 17
Catalonia, Kurdistan, Patriotism, Flags and Referendums - 24th Sep 17
Two Key Indicators Show the S&P 500 Becoming the New ‘Cash’ - 24th Sep 17
The Felling of Sheffield's Big Street Trees 2017 - Dobcroft Road - 24th Sep 17
Advantages of Forex Trading - 24th Sep 17
Stocks, Gold, Dollar, Bitcoin Markets Analysis - 23rd Sep 17
How Will We Be Affected by a Series of Rate Hikes? - 23rd Sep 17
Fed Quantitative Tightening Impact on Stocks and Gold - 22nd Sep 17
Bitcoin & Blockchain: All Hype or Part of a Financial Revolution? - 22nd Sep 17
Pensions and Debt Time Bomb In UK: £1 Trillion Crisis Looms - 22nd Sep 17
Will North Korea Boost Gold Prices? Part I - 22nd Sep 17
USDJPY Leads the way for a Resurgent Greenback - 22nd Sep 17
Day Trading Guide for Dummies - 22nd Sep 17
Short-Term Uncertainty, As Stocks Fluctuate Along Record Highs - 21st Sep 17
4 Reasons Gold is Starting to Look Attractive as Cryptocurrencies Falter - 21st Sep 17
Should Liners Invest in Shipping Software Solutions and Benefits of Using Packaged Shipping Software - 21st Sep 17
The 5 Biggest Bubbles In Markets Today - 20th Sep 17
Infographic: The Everything Bubble Is Ready to Pop - 20th Sep 17
Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years - 20th Sep 17
Stock Market Waiting Game... - 20th Sep 17
Precious Metals Sector is on Major Buy Signal - 20th Sep 17
US Equities Destined For Negative Returns In The Next 7 Years - 3 Assets To Invest In Instead - 20th Sep 17
Looking For the Next Big Stock? Look at Design - 20th Sep 17
Self Employed? Understanding Business Insurance - 19th Sep 17
Stock Market Bubble Fortunes - 19th Sep 17
USD/CHF – Verification of Breakout or Further Declines? - 19th Sep 17
Blockchain Tech: Don't Say You Didn't Know - 19th Sep 17
The Fed’s 2% Inflation Target Is Pointless - 19th Sep 17
How To Resolve the Korean Conundrum  - 19th Sep 17
A World Doomed to a Never Ending War - 19th Sep 17
What is Backtesting? And Why You Need Backtesting System? - 19th Sep 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Corporations Bringing the Big Bucks Home May Not Be the Solution

Companies / Corporate Earnings Dec 21, 2016 - 07:39 AM GMT

By: Rodney_Johnson

Companies Apple has a lot of cash.

At last count, the company’s horde had grown to a record $237 billion. But, as we all know, almost half of that supply is stuck overseas. If Apple, or any other company that paid lower taxes (or no taxes at all) in a foreign jurisdiction brings the money home, they’ll have to pay Uncle Sam up to 40%.


Ouch!

President Obama recommended charging companies a lower tax rate of 19% on repatriated profits, but President-Elect Trump has floated lower numbers – zero to 5%. He wants to tie taxes on corporate profits from overseas to infrastructure projects at home, providing some budget cover for his campaign promises.

Both approaches try to accomplish the same goal: provide companies a way to bring home the idle funds sitting in foreign accounts so that they can put the money to use domestically.

The problem is companies have already deployed a lot of that money. On top of that, they aren’t spending all the bucks they hold in the U.S., anyway.

In 2013, Apple (Nasdaq: AAPL) issued $17 billion of bonds. By any reading of its balance sheet, the company didn’t need the money. It had more than $100 billion in cash and was creating $20 billion worth of free cash every quarter. But a big chunk of that money passed through Ireland so it wasn’t taxed (which is a big can of worms we can open another time).

Instead of bringing the cash back to the U.S. and paying Uncle Sam, Apple kept the money offshore and issued bonds domestically to pay dividends and buy back its stock.

The company owes the U.S. taxes on the interest it earns overseas, but it writes off the interest it pays on outstanding bonds.

In the world of accounting, to the extent the company issued bonds, the foreign cash holdings were a wash.

In the big picture, this must have worked out well for Apple, because the company did the same thing again in this year, as did IBM (NYSE: IBM), which also holds billions of dollars overseas.

Microsoft (Nasdaq: MSFT), which has more than $100 billion outside the U.S., issued bonds to fund its purchase of LinkedIn.

Alphabet (Nasdaq: GOOGL), formerly Google, is also a member of the “they-can’t-need-the-money-but-issued-bonds-anyway” club.

Presumably, when these companies finally bring home buckets of cash they’ll immediately pay down their outstanding debt, pairing off their assets and liabilities.

There’s no question that companies like Apple, Microsoft, IBM, Alphabet, and others that hold large amounts of cash overseas have more foreign funds than domestic bonds outstanding.

But the point is that those funds aren’t as idle as they might appear. So, when they finally make it back stateside, chances are they won’t generate a flurry of new corporate investments.

Even if the funds were totally unencumbered, we shouldn’t expect companies to deploy them if they bring them home. While U.S. companies hold $2.1 trillion overseas, they also hold $1.92 trillion domestically. The foreign funds might be hard to spend, but the local cash doesn’t have strings attached.

If there are so many good uses of cash out there, just waiting to be funded if only we could get foreign profits home without an onerous tax, then why is so much money sitting in corporate coffers here at home?

The answer is obvious, even if it’s not a happy message.

Corporate leaders don’t see enough opportunity for sales to warrant further investments. They know that low growth, the hallmark of the economic recovery since 2009, will be with us for several more years. Their cost-conscious customers reiterate that fact every day with their purchasing choices.

Another testament to the low-growth story is what many companies actually do with their excess cash and bond proceeds – buy back their own stock. When your best use of cash is to purchase your company shares on the open market, it must mean the corporate landscape is devoid of good investment opportunities.

None of this should be news to investors, who have something of the same problem. We all want our money to work for us, and yet we have $2.7 trillion sitting in money market funds that pay little, if any, interest.

And banks are no exception. Financial institutions hold $2.2 trillion in excess reserves at the Federal Reserve. These are funds that could be lent as new credit, if only they could find worthy borrowers and projects.

Across the board, our economy has a lot more cash available than it currently needs, which in part explains low yields and high stock prices. Adding more monetary fuel won’t make the economic fire burn any hotter.

So, don’t hold your breath waiting for a burst of activity based on a flood of money coming home. When all is said and done, instead of a flood it could be a stream of water that’s already passed under the bridge.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2016 Rodney Johnson - All Rights Reserved 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.

Rodney Johnson Archive

© 2005-2017 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

Catching a Falling Financial Knife