One of the most prominent criticisms of the Tax Cuts and Jobs Act of 2017 was that many corporations would end up using the tax savings from the overhaul to repurchase shares instead of investing directly in the U.S. economy through capital investments or employee wage growth. Most companies aren't even increasing dividend payouts to income investors more than they otherwise would.
While adjusting capital structure has strategic benefits, the broader criticisms around buybacks still somewhat apply to Apple (AAPL 0.32%). To be fair, Apple is fortunate enough to have so much money that it can pursue aggressive capital returns through buybacks while also investing in the U.S. economy -- the Mac maker had announced a $350 billion investment in America a month after tax reform passed.
Apple CEO Tim Cook. Image source: Apple.
Buybacks over dividends
After announcing its capital return program in early 2012, Apple started repurchasing shares at the end of that year. The company steadily ramped up its repurchase authorization, with its board of directors regularly approving more buybacks whenever Apple approached its limit.
Tax reform, which cut the statutory corporate tax rate from 35% to 21%, was passed in December 2017 with just a few days left in the year and went into effect on Jan. 1, 2018. Apple, among other companies, immediately started buying back shares hand over fist with those savings. Apple's repurchase spending more than doubled from $32.1 billion in 2017 to $71.1 billion in 2018. The final tally for 2019 buybacks was even higher: $78.9 billion.
Data source: Apple. Chart by author. Calendar years shown.
Dividends have increased steadily, but not by much in comparison. Apple paid out $14 billion in dividends and dividend equivalents last year, about the same as it paid out in 2018. The tech juggernaut updates its capital return program every year when it reports fiscal second-quarter results (late April or early May), and last time only boosted its dividend payout by a relatively modest 5% to $0.77 per share.
Remember that dividends are paid out of after-tax profits, while repurchasing shares creates dividend savings once those shares are retired. From the investor's perspective, shares sold back to the company are taxed at lower capital gains rates, while dividends received are generally taxed higher as ordinary income.
It's also true that companies are usually reluctant to suddenly boost dividend payouts, particularly in the U.S., since those increases compound over time and investors have come to expect regular increases. Regular dividend policies, where companies pay out a steady amount ideally with regular boosts, are popular among American companies, while stable dividend policies, which pay out a fixed percentage of profits, are more common abroad.
Still, Apple could have paid out a special one-time dividend if it really wanted to, especially as the company laid out a "net cash neutral" goal in early 2018 that CFO Luca Maestri reaffirmed this week. About $99 billion in net cash remains on the balance sheet, so it still has a long ways to go.
