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They are returning it to stock holders - however, it is not tax efficient to do this by simply paying dividends with profits. By offshoring the money they can m

They are returning it to stock holders - however, it is not tax efficient to do this by simply paying dividends with profits. By offshoring the money they can minimize taxes, and still pay stock holders by taking massive loans with the cash hoard as security, effectively repatriating the money without paying taxes. As an aside, they are not mainly paying dividends to get this money to stock holders. Pushed heavily by large Apple owners like Icahn, apple is buying back it's own stock - effectively paying dividends by raising the stock price. I don't recall the exact details why, but somehow that ends up also being more tax efficient. Eg: https://www.google.com/amp/s/www.forbes.com/sites/antoinegara/2016/02/16/apple-readies-itself-for-a-new-debt-fueled-stock-buyback/amp/ https://www.google.com/amp/s/www.forbes.com/sites/antoinegar... Source: https://www.amazon.com/dp/B014BR46P2/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1 https://www.amazon.com/dp/B014BR46P2/ref=dp-kindle-redirect?...

TuringNYC 10y ago
Buy-backs are more tax efficient because they increase stock price. Stock price increases are not taxed until they are realized, so it is beneficial to long-term stockholders who may not sell for many years, possibly not for decades. Dividends are taxed in the year of payment, so investors lose some of that gain within a year. On the flip side, buy-backs can be a poor way to spend cash, as companies might buy back at high stock prices. So the third way to reward the stockholder is to just keep that cash stashed in a bank account -- you get neither taxed (dividends) nor do you buy back potentially inflated shares. However, you have the cash stashed away to do either if you ever need to, or find a good opportunity to (e.g., stock price slump.)
- portent 10y ago
  Personally I don't understand why a buy-back should increase stock price. Sure, there are fewer shares - but the value of the company has gone down (it has less free cash, i.e. fewer assets) and the two effects should exactly offset each other.
  - mgolawala 10y ago
    The value of the shares goes up because, even if the business and profitability stays exactly the same, with fewer out standing shares, the earnings per share goes up.
    - portent 10y ago
      Yeah but if you transfer an asset (cash) out of the company, all other things being equal, the value of the shares must go down. This McKinsey article is old but explores the topic in some detail. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-value-of-share-buybacks http://www.mckinsey.com/business-functions/strategy-and-corp... -- "Sending signals The market responds to announcements of buybacks because they offer new information, often called a signal, about a company’s future and hence its share price. One well-known positive signal in a buyback is that management seems to believe that the stock is undervalued. Executives can enhance this effect by personally purchasing significant numbers of shares, since market participants see them as de facto insiders with privileged information about future earnings and growth prospects. A second positive signal is management’s confidence that the company doesn’t need the cash to cover future commitments such as interest payments and capital expenditures. But there is a third, negative, signal with a buyback: that the management team sees few investment opportunities ahead, suggesting to investors that they could do better by putting their money elsewhere. Some managers are reluctant to launch buyback programs for this reason, but the capital market’s mostly positive reaction to such announcements indicates that this signal isn’t an issue in most cases. In fact, the strength of the market’s reaction implies that shareholders often realize that a company has more cash than it can invest long before its management does. Therefore, the overall positive response to a buyback may well result from investors being relieved that managers aren’t going to spend a company’s cash on inadvisable mergers and acquisitions or on projects with a negative net present value. In many cases, a company seems to be undervalued just before it announces a buyback, reflecting an uncertainty among investors about what management will do with excess funds. Such shareholder skepticism would be well founded. In many industries, management teams have historically allocated cash reserves poorly. The oil industry since 1964 is one example (Exhibit 4): a huge price umbrella for much of this period, courtesy of the Organization of Petroleum Exporting Countries (OPEC), provided oil companies with relatively high margins. Nevertheless, for almost three decades the spread between ROIC and cost of capital for the industry as a whole was negative. Convinced that on a sustained basis the petroleum industry could not deliver a balanced source of income, many companies committed their excess cash to what turned out to be value-destroying acquisitions or other diversification strategies. For example, in the 1970s, Mobil bought retailer Montgomery Ward; Atlantic Richfield purchased Anaconda, a metal and mining company; and Exxon bought a majority stake in Vydec, a company specializing in office automation. All of these cash (or mostly cash) acquisitions resulted in significant losses."
- TuringNYC 10y ago
  That is the strangest down-vote I've ever received on a textbook answer straight from Finance 101.
  - portent 10y ago
    I think it's much more subtle point than buy-backs increase share price, otherwise it opens up some basic arbitrages. The point is, the share price already incorporates the value of the assets used for the buy-back, so buying back shares increases earnings per share but reduces asset values (and future earnings from leveraging those assets) and the two effects offset. Simple example: company A has 100 shares outstanding and only 1 asset: $100 The value of each share is $1. It then decides a share buy-back is a good strategy, and buys back 50 shares for $50. It now has 50 shares outstanding and $50 of assets. The value of each share is still $1. The buy-back has no effect on share price.
    - TuringNYC 10y ago
      The question was about why buybacks are more tax efficient -- the answer is open-and-shut -- because benefit realization with buybacks is pushed to time of sale (in many cases far in the future), which is more advantageous than dividends which get taxed in the same tax year. In any case -- to answer your question -- in your example, it would not have any effect on share price as it seems the company is just a holding company for $100. However, in the case of Apple they have other assets besides the cash (brand, intellectual property) and those assets produce more cash -- so all the cash the other assets generate in the future gets distributed to a smaller number of shareholders.
      - portent 10y ago
        On the point about taxation, if you have a choice between dividends or share appreciation, I agree with you that share value appreciation gives more flexibility to better manage tax liabilities. But you answered as a fact that a share buyback increases share price, and sorry but I don't agree with that point - as demonstrated, for an asset holding company it is not the case. And for a company with cash generation capabilities there is still a subtle point about whether the company can create more value with the cash than the shareholders; if the company can create more value than shareholders, then removing cash from the company via a share buyback should reduce share price. If it cannot, then removing cash from the company should increase the share price.
whack 10y ago
> "however, it is not tax efficient to do this by simply paying dividends with profits. By offshoring the money they can minimize taxes, and still pay stock holders by taking massive loans with the cash hoard as security, effectively repatriating the money without paying taxes." Assuming that there's no tax holiday, the above is a losing strategy over the long term. The ROI that Apple is getting on its cash hoard, which is mostly getting invested in treasuries and other ultra-safe investments, is lower than the interest rate that Apple is paying on its debt. Which means that by borrowing money at 3.5% interest and investing it at a lower ROI, Apple is bleeding money every single year. Yes, they avoid having to pay taxes for now, but they are just pushing this off to a later date. If they adopt a strategy of keeping the money offshore forever, their interest debt will keep ballooning, and the amount of money they lose on interest debt over the long-term will overshadow any one-time tax payments. Apple's strategy only makes sense if they are anticipating a tax holiday in the short/medium term, at which point they can repatriate all their money at a lower tax rate. I hope to hell they don't get it, because if they do, every single company is going to start doing the exact same thing. It will become yet another gigantic tax loophole, and a drag on the economy to boot.
- alanfalcon 10y ago
  Surely Apple's semi-recent mega-success (iPhone onwards) puts them in a fairly uncommon position among companies? For this strategy to work, don't they need a huge surplus of (foreign) cash AND a reasonable expectation of a Tax Holiday in the near/medium future? Given those, it would seem most companies would be wrong to do the exact same thing (even if in this case Apple "gets away with it").
- valuearb 10y ago
  Every company is doing it already, because it can be tax efficient even if no tax holiday ever occurs. let me show how. Let's assume Apple earns 2.5% on its Ireland cash, but is paying 4% to borrow against it. On US profits it has to pay almost 41% in taxes, on its Irish interest income it's laying almost zero. It's debt interest is tax deductible and hence costs less than 2.4%, making this example profitable. And nothing stops Apple from buying short term investments that yield close to its boeriwng costs. But even if it's close to break even it's a no brainer. Once you repatriate profits you can never undo the tax consequences for those profits. And events other than tax holidays can happen that may cause you to regret not waiting. For example, if Apple decides to do a large international acquisition/investment (Porsche?), and pay $50B in cash as part of it. They would have had to repatriate over $80B to have $50B after tax. Or they could do the acquisition from Ireland for only $50B.
samfisher83 10y ago
From an economic point of view it is kind of sitting their doing nothing. It would be better used if it was spent on something so it could creating jobs or something more than just sitting there. I think the government needs to make some incentive for them to give it to share holders or in someway use it.

TuringNYC 10y ago

Buy-backs are more tax efficient because they increase stock price. Stock price increases are not taxed until they are realized, so it is beneficial to long-term stockholders who may not sell for many years, possibly not for decades. Dividends are taxed in the year of payment, so investors lose some of that gain within a year. On the flip side, buy-backs can be a poor way to spend cash, as companies might buy back at high stock prices. So the third way to reward the stockholder is to just keep that cash stashed in a bank account -- you get neither taxed (dividends) nor do you buy back potentially inflated shares. However, you have the cash stashed away to do either if you ever need to, or find a good opportunity to (e.g., stock price slump.)

portent 10y ago
Personally I don't understand why a buy-back should increase stock price. Sure, there are fewer shares - but the value of the company has gone down (it has less free cash, i.e. fewer assets) and the two effects should exactly offset each other.
- mgolawala 10y ago
  The value of the shares goes up because, even if the business and profitability stays exactly the same, with fewer out standing shares, the earnings per share goes up.
  - portent 10y ago
    Yeah but if you transfer an asset (cash) out of the company, all other things being equal, the value of the shares must go down. This McKinsey article is old but explores the topic in some detail. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-value-of-share-buybacks http://www.mckinsey.com/business-functions/strategy-and-corp... -- "Sending signals The market responds to announcements of buybacks because they offer new information, often called a signal, about a company’s future and hence its share price. One well-known positive signal in a buyback is that management seems to believe that the stock is undervalued. Executives can enhance this effect by personally purchasing significant numbers of shares, since market participants see them as de facto insiders with privileged information about future earnings and growth prospects. A second positive signal is management’s confidence that the company doesn’t need the cash to cover future commitments such as interest payments and capital expenditures. But there is a third, negative, signal with a buyback: that the management team sees few investment opportunities ahead, suggesting to investors that they could do better by putting their money elsewhere. Some managers are reluctant to launch buyback programs for this reason, but the capital market’s mostly positive reaction to such announcements indicates that this signal isn’t an issue in most cases. In fact, the strength of the market’s reaction implies that shareholders often realize that a company has more cash than it can invest long before its management does. Therefore, the overall positive response to a buyback may well result from investors being relieved that managers aren’t going to spend a company’s cash on inadvisable mergers and acquisitions or on projects with a negative net present value. In many cases, a company seems to be undervalued just before it announces a buyback, reflecting an uncertainty among investors about what management will do with excess funds. Such shareholder skepticism would be well founded. In many industries, management teams have historically allocated cash reserves poorly. The oil industry since 1964 is one example (Exhibit 4): a huge price umbrella for much of this period, courtesy of the Organization of Petroleum Exporting Countries (OPEC), provided oil companies with relatively high margins. Nevertheless, for almost three decades the spread between ROIC and cost of capital for the industry as a whole was negative. Convinced that on a sustained basis the petroleum industry could not deliver a balanced source of income, many companies committed their excess cash to what turned out to be value-destroying acquisitions or other diversification strategies. For example, in the 1970s, Mobil bought retailer Montgomery Ward; Atlantic Richfield purchased Anaconda, a metal and mining company; and Exxon bought a majority stake in Vydec, a company specializing in office automation. All of these cash (or mostly cash) acquisitions resulted in significant losses."
TuringNYC 10y ago
That is the strangest down-vote I've ever received on a textbook answer straight from Finance 101.
- portent 10y ago
  I think it's much more subtle point than buy-backs increase share price, otherwise it opens up some basic arbitrages. The point is, the share price already incorporates the value of the assets used for the buy-back, so buying back shares increases earnings per share but reduces asset values (and future earnings from leveraging those assets) and the two effects offset. Simple example: company A has 100 shares outstanding and only 1 asset: $100 The value of each share is $1. It then decides a share buy-back is a good strategy, and buys back 50 shares for $50. It now has 50 shares outstanding and $50 of assets. The value of each share is still $1. The buy-back has no effect on share price.
  - TuringNYC 10y ago
    The question was about why buybacks are more tax efficient -- the answer is open-and-shut -- because benefit realization with buybacks is pushed to time of sale (in many cases far in the future), which is more advantageous than dividends which get taxed in the same tax year. In any case -- to answer your question -- in your example, it would not have any effect on share price as it seems the company is just a holding company for $100. However, in the case of Apple they have other assets besides the cash (brand, intellectual property) and those assets produce more cash -- so all the cash the other assets generate in the future gets distributed to a smaller number of shareholders.
    - portent 10y ago
      On the point about taxation, if you have a choice between dividends or share appreciation, I agree with you that share value appreciation gives more flexibility to better manage tax liabilities. But you answered as a fact that a share buyback increases share price, and sorry but I don't agree with that point - as demonstrated, for an asset holding company it is not the case. And for a company with cash generation capabilities there is still a subtle point about whether the company can create more value with the cash than the shareholders; if the company can create more value than shareholders, then removing cash from the company via a share buyback should reduce share price. If it cannot, then removing cash from the company should increase the share price.

whack 10y ago

> "however, it is not tax efficient to do this by simply paying dividends with profits. By offshoring the money they can minimize taxes, and still pay stock holders by taking massive loans with the cash hoard as security, effectively repatriating the money without paying taxes." Assuming that there's no tax holiday, the above is a losing strategy over the long term. The ROI that Apple is getting on its cash hoard, which is mostly getting invested in treasuries and other ultra-safe investments, is lower than the interest rate that Apple is paying on its debt. Which means that by borrowing money at 3.5% interest and investing it at a lower ROI, Apple is bleeding money every single year. Yes, they avoid having to pay taxes for now, but they are just pushing this off to a later date. If they adopt a strategy of keeping the money offshore forever, their interest debt will keep ballooning, and the amount of money they lose on interest debt over the long-term will overshadow any one-time tax payments. Apple's strategy only makes sense if they are anticipating a tax holiday in the short/medium term, at which point they can repatriate all their money at a lower tax rate. I hope to hell they don't get it, because if they do, every single company is going to start doing the exact same thing. It will become yet another gigantic tax loophole, and a drag on the economy to boot.

alanfalcon 10y ago
Surely Apple's semi-recent mega-success (iPhone onwards) puts them in a fairly uncommon position among companies? For this strategy to work, don't they need a huge surplus of (foreign) cash AND a reasonable expectation of a Tax Holiday in the near/medium future? Given those, it would seem most companies would be wrong to do the exact same thing (even if in this case Apple "gets away with it").
valuearb 10y ago
Every company is doing it already, because it can be tax efficient even if no tax holiday ever occurs. let me show how. Let's assume Apple earns 2.5% on its Ireland cash, but is paying 4% to borrow against it. On US profits it has to pay almost 41% in taxes, on its Irish interest income it's laying almost zero. It's debt interest is tax deductible and hence costs less than 2.4%, making this example profitable. And nothing stops Apple from buying short term investments that yield close to its boeriwng costs. But even if it's close to break even it's a no brainer. Once you repatriate profits you can never undo the tax consequences for those profits. And events other than tax holidays can happen that may cause you to regret not waiting. For example, if Apple decides to do a large international acquisition/investment (Porsche?), and pay $50B in cash as part of it. They would have had to repatriate over $80B to have $50B after tax. Or they could do the acquisition from Ireland for only $50B.

samfisher83 10y ago

From an economic point of view it is kind of sitting their doing nothing. It would be better used if it was spent on something so it could creating jobs or something more than just sitting there. I think the government needs to make some incentive for them to give it to share holders or in someway use it.