With all that cash, why is Apple borrowing to raise its dividend and buybacks?

By Tim Worstall , written on April 29, 2014

From The News Desk

Given that Apple has some $150 billion cash or near equivalents on its balance sheet it seems a little odd, perverse even, that they'll then borrow to finance the extra stock buybacks and raised dividend that they've announced. But that is what they're doing, they're issuing another $17 billion in bonds to finance the shareholder giveaway in what the Wall Street Journal calls the "largest corporate-bond deal in history."

The reason is the seriously screwed-up corporate taxation system. Of course, there are different levels of being screwed-up: to the purist, there should be no taxation of returns to capital at all: this is the outcome of optimal taxation theory. Because average wages in any economy are determined by average labor productivity, and productivity is raised by adding capital to labor, therefore you don't want to tax capital as that will lower the amount being added to labor and thus, over time, lower the workers' wages. This doesn't have a celluloid rat's chance in hell of convincing either the public or the political classes of course, however correct it might be.

So, the US system charges a corporate income tax on 35 percent of profits. It then charges the dividends, which have already paid this, a further 15 percent when they hit the wallets of investors. This gives the US one of the world's highest dividend taxation rates, another screw-up.

But yes, there's more: if an American company earns profits outside the country it still has to pay that 35 percent, unless it declares that it's going to keep it offshore forever. So, that's what many US companies do with their foreign profits. They keep them offshore, perhaps invest them in new factories in other countries, go surfing on the cash pile like Scrooge McDuck, but what they don't do is bring them back into the US. They don't get invested in the US economy, nor out to shareholders where at least they might be spent in the US economy. A final screw-up.

As a way of making sure that investment capital leaves the US never to return, it's pretty hard to beat all of that. And of Apple's $150 billion or so in cash and equivalents (ie, things that can be sold quickly for cash, T-bills and the like) some $130 billion is that foreign type of profit. They've currently paid around 2 percent tax on it and if they brought it back into the US they would have to pay the other 33 percent to get to the 35 percent statutory rate. Something which, amazingly, they're not willing to do. So, to pay for this larger dividend and share buyback instead they're borrowing money which they can use to pay the shareholders, to be paid back in the future out of their standard North American profits (ie, those they already do pay full US corporate income tax on).

They are not, of course, the only company in this situation. Pfizer's bid for AstraZeneca is being driven by the same calculation over offshore profits. Facebook, Microsoft, Google, and all the rest have similar stashes. One reasonable estimate is that there's some $2 trillion in untaxed offshore profits.

That purist I mentioned above would argue that there's a simple solution. Just don't tax the foreign profits of US companies. Let them bring them home and pay them out to shareholders. Who would either spend them (fiscal stimulus!) or reinvest them in other companies (perhaps more money for startups!) but at the very least it would stop the cash from rotting away in foreign banks accounts.

But it ain't gonna happen: the political classes just aren't going to let $2 trillion sail by without appropriating some of it for their own pet projects.

[Image courtesy Omar Omar]