How Apple Slows the U.S. Economic Recovery

The U.S. economy is barely recovering, even as the Federal Reserve does everything in its power to stimulate it. The economy would be doing far better if companies were reinvesting their cash back into it. Yet the most profitable companies, Apple (NASDAQ: AAPL  ) and other large tech companies, are slowing the U.S. economic recovery by stashing billions of dollars abroad. Read more to find out why companies aren't reinvesting your cash, why this is Congress' fault, and what should be done about it.

How a vibrant economy works
Let's use Ford (NYSE: F  ) as an example.

Say you buy a new car from Ford for $10,000. Where does your money go?

$8,640

Cost of goods sold

$650

Selling, general, and administrative expenses

$275

Advertising

$120

Taxes

This leaves $315 in profit for Ford.

From there, Ford reinvests $145, or 46%, of its $315 profit back into the business. The company also pays outs $75, or 24%, of its profit as dividends to its shareholders.

Adding it all up, with your purchase, $9,905 was recycled back into the economy.

What happens when you buy from Apple
Now let's look at Apple. Say you buy five laptops for $10,000. Where does your money go?

$6,240

Cost of goods sold

$570

Selling, general, and administrative expenses

$260

Research and development

$65

Advertising

$749

Taxes

This leaves $2,117 in profit for Apple.

Apple reinvests $656, or 31%, of its profit back into the business. Apple then pays outs $603, or 28%, of its profit as dividends to its shareholders. Apple then puts the remaining cash in the bank, taking $859 out of the economy.

So, with your purchase, only $9,141 was recycled back into the economy.

Now, we all want to save some money now and then. The problem is that Apple is already sitting on $150 billion in cash. Roughly $100 billion of that is excess cash, meaning cash and current assets minus all of the company's liabilities.

Stagnation
When savings sit idle, economic growth slows, unemployment rises, and wages fall. I use Apple as an example because it is the largest company hoarding cash, but it is not the only one. U.S. companies are sitting on nearly $1 trillion worth of foreign earnings, with the top 10 public companies excluding financials sitting on roughly $300 billion worth. Rounding out the top three public companies holding excess cash are:

 

Company

Excess Cash

1

Apple

$96 billion

2

Google (NASDAQ: GOOGL  )

$46.8

3

Microsoft (NASDAQ: MSFT  )

$38.7

Source: S&P Capital IQ.

Why is this happening?

Congress
The first reason is that the U.S.' corporate tax rate is the second-highest in the world.

The big reason, though, is that companies are waiting for another tax holiday. This is the unintended consequence of the 2004 Repatriation Tax holiday that Congress passed in an effort to stimulate the economy. The hope was that by incentivizing companies to bring back foreign earnings with onetime low tax rates, U.S. firms would invest the money, spurring on the economy.

The last tax holiday failed to stimulate the economy, however. Most of the money went to share buybacks, rather than investments in the real economy. The tax holiday also had the unintended consequence of prompting more companies to hoard cash abroad and reclassify earnings as foreign in the hope that Congress would implement another tax holiday.

What you can do
The best solution would be for Congress to reform the corporate tax system by lowering the rate and closing loopholes. While that would take a while to pass, in the short run I continue to push for a repatriation tax holiday that gives dividends to shareholders, as consumers are more likely to productively use cash than companies that are just hoarding it.

As shareholders, it is your money that is sitting abroad going unused. That is $106 per Apple share, $140 per Google share, and $4.70 per Microsoft share. While you may not own shares directly, Apple, Google, and Microsoft make up a combined 6.7% of the S&P 500, so most investors have some stake in them.

If companies cannot find ways to invest excess cash in profitable endeavors, they should distribute the cash to their millions of shareholders, who I'm sure could find ways to put the cash to productive use.

More Foolish insight
With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (19) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2013, at 7:30 PM, makelvin wrote:

    Comparing the two charts between Ford and Apple, I can't say definitively that Ford is better at helping the US economy over Apple.

    First, Ford does not even show any of its money going back into R&D which means that it is probably small enough to be negligible. Apple has $260 going back into R&D. These are the high paying jobs that Americans like to have.

    Second, Ford's chart only shows that they are actually paying $120 in taxes as oppose to Apple's $749. This means Apple's product are support more of our government and its programs for more Americans than Ford by a long shot.

    The other three categories that Ford's chart is showing to be significantly higher is Cost of Good Sold, General Administrative Fee, and Advertising. The higher Administrative Fee and Cost of Good Sold only means that Ford is running it's business much less efficiently than Apple which doesn't bolt well in a very competitive market place for Ford.

    As for Advertising, it is not the kind of jobs that can help US to become more competitive globally and therefore cannot help US economy in the long run.

  • Report this Comment On December 11, 2013, at 7:55 PM, EyeHateFools wrote:

    Why can't congress just create a temporary (or permanent) tax holiday that brings the money back into the US at a much more reasonable rate but with strings attached. We could give big credits for job creation that can offset the taxes for repatriation and effectively lower the tax rate for repatriated money. I am sure that the money won't come back if congress continues to hold out for outrageous taxes, and it gives companies a lot of incentive to spend overseas. So we can do nothing and get nothing, or we can give incentives and get a lot. The title of this article should be how the US government slows the US Economic Recovery, it's their fault, not these big companies.

  • Report this Comment On December 11, 2013, at 8:09 PM, TMFDanDzombak wrote:

    @EyeHatefools

    I've written before about why the last repatriation tax holiday was a failure and proposed a solution.

    From http://www.fool.com/investing/dividends-income/2013/10/23/ho...

    The American Jobs Creation Act of 2004 produced the last repatriation-tax holiday in the U.S. Companies brought home $312 billion, with the top 15 companies making up 52% of that amount. However, the tax holiday did not stimulate investments and jobs.

    The top paper on the effects of the American Jobs Creation Act, the National Bureau of Economic Research's "Watch What I Do, Not What I Say," found that "a $1 increase in repatriations was associated with a $0.79 increase in share repurchases and a $0.15 increase in dividends."

    The majority of companies used the funds for share buybacks, rather than for investment, even though this was not allowed under the American Jobs Creation Act. Companies got around lawmakers' intent by using the repatriated money for investments they would have made anyway and using their U.S. cash for share repurchases. As tax experts at the Heritage Foundation wrote, "The evidence is clear that these repatriations did not produce the hoped-for subsequent surge in domestic investment."

  • Report this Comment On December 11, 2013, at 8:19 PM, bugnuts wrote:

    Doh! If Apple was repatriating that cash and paying the full tax freight, MF would be slamming it for not protecting its profits.

    Sometimes you just can't win.

  • Report this Comment On December 11, 2013, at 8:35 PM, TMFDanDzombak wrote:

    @bugnuts

    Not at all. I am slamming Apple and the rest for doing nothing with their cash, and I am pushing for them to pay out the cash as special dividends.

  • Report this Comment On December 11, 2013, at 10:08 PM, mjrkong wrote:

    Umm, given the base intelligence level of MF, here's a much better headline for all the ignorant eyeballs:

    "L PAGE SAVES ORPHANS FROM VEHICLE FIRE ON LONELY COUNTRY ROAD, T. COOK JUST WATCHES FROM HELO."

    Get it now?

  • Report this Comment On December 11, 2013, at 10:47 PM, sidste wrote:

    So what happened to the SG&A, R&D, Advertising and taxes? Isn't this money put back into the economy? I'm pretty sure that the government spends all those tax dollars - and them some. The other categories pay's people's salaries, which, being good Americans, they spend.

    Even if you assume most of the CGS goes over seas, but I'm sure some royalty payments come back to the US from that.

    I don't entirely agree with your methodology here.

  • Report this Comment On December 11, 2013, at 11:11 PM, digitek wrote:

    If you think dividends go "back into the US economy" you don't understand dividends. Dividends only further privatize corporate profits to the largest shareholders - and the largest shareholders have very clever ways of making sure that money DOESN'T re-enter the economy.

    That being said, re-investing makes a lot of sense if there are actually things to reinvest in. If Apple spends its "profits" depending on how they spend it either hurts their profit margins (if spent on further R&D) or effective tax rate if brought back into the US - both of which have to be explained to share holders.

    This is a case of misaligned international tax codes, not placing blame on large corporations which have an obligation to their shareholders to make the most efficient use of available tax laws.

  • Report this Comment On December 11, 2013, at 11:46 PM, johnestromjr wrote:

    Your article is a distortion of reality. You're comparing apples and oranges. A car made in Detroit is mostly American labor and mostly American parts. Apple buys most of its parts from overseas vendors, assembles the devices overseas and then imports them. They follow the tax laws and written by congress and signed by whichever president is then in power. The fact they don't pay enough taxes - in YOUR view - is bogus. They paid $6 billion in taxes last year even though Sen. Carl Levin and Sen. McCain squealed in agony. Meanwhile those two "patriots" and guardians of the purse didn't call GE or Big Oil before their inquisiton to explain why they paid NO taxes on their $Billions. Your "outrage" seems to be very selective. Get a life Dan.

  • Report this Comment On December 12, 2013, at 9:48 AM, TMFDanDzombak wrote:

    @sidste Yes, all of that gets put back in the economy.

    The point I'm making is that with the example of Ford 99% of the money goes back into the economy, while with Apple only 90% goes back into the economy.

    Apple's size means this has a real dampening effect on the economy.

  • Report this Comment On December 12, 2013, at 9:54 AM, TMFDanDzombak wrote:

    @digitek

    A 2007 study, "The Effects of Dividends on Consumption" found that on average, households withdraw from investment accounts 33% of large special dividends and 77% of ordinary dividends, while capital gains are not associated with any withdrawals.

    www.fool.com/investing/dividends-income/2013/10/23/how-to-bo...

    The Effects of Dividends on Consumption

    http://www.nber.org/papers/w12288

  • Report this Comment On December 12, 2013, at 9:56 AM, TMFDanDzombak wrote:

    @johnestromjr

    Your comment is a distortion of the article.

  • Report this Comment On December 12, 2013, at 10:15 AM, Mathman6577 wrote:

    Dan: Maybe a future article?

    It would be nice to compare lost gains from foreign cash holdings to the cost of bailing out various entities (e.g. GM, AIG, Merrill Lynch, Fannie, Freddie, etc.). While in some cases it may have been necessary to provide assistance the overall effort has cost US taxpayers (and the economy) a good chunk of change over the last 5 years.

    Even if Apple brought back half of its excess cash (~$48B) and assuming 3% ($1.44B) of that is put back into the economy somehow it would still be well short of what the Treasury lost on GM stock ($10B) [does not count the money that the bondholders have lost].

  • Report this Comment On December 12, 2013, at 11:24 AM, TMFGortok wrote:

    If that money is in a bank, then that bank now has capital that it can use to loan out to other companies. In effect, Apple's savings has driven investment by expanding the available pool of capital .

    Whether or not that's being invested in the United States is a political issue (as you point out). But it does go into the world economy, and their growth does allow them to hire more people to work -- so it isn't as if Apple executives are just swimming in a vault of money (although that's a memorable image from my childhood).

  • Report this Comment On December 12, 2013, at 12:36 PM, TMFDanDzombak wrote:

    @TMFGortok

    Banks are already drowning in excess capital from central banks stimulus efforts. Apple's savings aren't being loaned out for any real effect on the economy.

  • Report this Comment On December 12, 2013, at 5:51 PM, xetn wrote:

    The Fed's attempts to central plan the money supply and interest rate is a complete failure! You can not (re)build an economy by spending and debt.

    The only thing that creates economic (long term) growth is investment in capital goods. The US has been consuming its capital for several years. That more than anything, explains the decline of the US economy ( and most of the rest of the world's economies). Its called fascism. It got its start in the US with FDR's inverventions in the economy.

  • Report this Comment On December 12, 2013, at 11:50 PM, harmonyjoe wrote:

    Xetn completely overlooks the fact that the US could spend every excess dollar it has on Capital goods and the economy would still be in the doldrums. The Supply Siders all think that if the US has the latest in Capital goods all its problems will be over. Never mind the fact that most US consumers don't have the dollars to purchase anything. Maybe all those updated Capital goods will make US industry so efficient it will be able to give its product away and still make a profit.

  • Report this Comment On December 13, 2013, at 11:10 AM, johnluma wrote:

    Okay you made a strong point about how our companies can help strengthen our economy. But... But these two companies have had great success at this through the last few years by employing tens of thousands of employees, and making tens of thousands of investors richer by far. And let's not forget that in this world economy where change happens at lightning speed, Cash Is King.

  • Report this Comment On December 13, 2013, at 6:42 PM, jimmybox wrote:

    The author makes the classic Keynesian fallacy of conflating real output with nominal output. It is the production of other goods (not money!) that creates the demand for iPods, etc. As Jean-Baptiste Say wrote, "Money is but the agent of the transfer of values." A modestly higher "liquidity preference" does not weigh on real production or consumption. Rather, it merely affects the prices at which various productions are exchanged.

    From Say's Treatise on Political Economy:

    "Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist…"

Add your comment.

DocumentId: 2760428, ~/Articles/ArticleHandler.aspx, 4/19/2014 9:01:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement