In 3 years, under the new repatriation rules, Apple will have freed up enough cash to reduce its share count by 25%.
From a note to clients by UBS analyst Steve Milunovich that landed in my inbox Tuesday:
Annual repurchase rate of 4% of shares could go to at least 7%, in our view Apple clearly is a beneficiary of overseas cash repatriation. We assess the potential magnitude and find that repatriation could free up an incremental $25bn. Including regular FCF, we figure there could be $122bn available over a two year period or 14% of the market cap while maintaining a net cash position of $90bn. Our analysis is based on an estimate of a post-repatriation target capital structure that has been fairly consistent the last five years. Apple has been buying about 5% of the company per year. Repatriation increases the rate, which should be helpful as investors ask what’s next.
Apple’s target capital structure determines repurchase rate We assume that Apple has been targeting a net cash position as if its foreign cash were brought back at a 25% rate, which is the statutory rate less foreign tax credits of ~10%. This implies Apple has been targeting a $90-100bn net cash position over the past several years (Figure 2). Repatriation at 15.5% frees up some $24bn assuming net cash remains at $90bn. Combined with regular annual FCF seen at ~$60bn, we estimate Apple could spend perhaps $122bn on buybacks through 2019 and still maintain this $90bn net cash position. However, if Apple targets a lower net cash figure, say $60bn, the percentage of outstanding repurchased over two years might rise from 14% to 18%.
Click to enlarge.
My take: Apple doesn’t have that much choice. Trump’s tax code, I’m told, requires companies to repatriate overseas profits.