Though they own stock in one of the most admired companies in the world, Apple (Nasdaq: AAPL) shareholders have one common, and stern, grievance: Why does the company hold so much cash, and why does it refuse to pay a dividend?
Conspiracy theories abound. Apple is saving for a massive acquisition. Management is inept. Steve Jobs is a just a jerk.
In truth, there's a good reason Apple isn't paying a dividend. All you have to know is this short passage from the company's 10-K annual report:
As of September 25, 2010 ... $30.8 billion ... of the Company's cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.
For perspective, Apple holds around $51 billion in total cash and cash equivalents. More than 60% of its cash hoard, then, is subject to repatriation taxes -- 35% -- if it's ever brought back to the U.S. Add in dividend taxes, and more than 50% of Apple's cash could be devoured by the IRS if paid out to shareholders.
Steve Jobs isn't a jerk. He can add. And you should thank him for it.
A broken system
U.S. companies have more than $1 trillion in cash abroad. Their options for this cash are straightforward: Pay a 35% repatriation tax to bring it home, or keep it abroad. Most wisely choose the latter.
There's an easy solution to this inanity: A repatriation tax holiday that lets companies bring foreign cash home with minimum penalty. It's been done before. In 2004, the Homeland Investment Act temporarily cut repatriation taxes to 5.25%. Roughly $300 billion returned to the U.S. over the following year, up from an average of $62 billion during the previous four. It worked, in other words. Quite well.
Congress attempted to include a repatriation holiday amendment as part of the 2009 stimulus package, but it was voted down. There's talk today of giving it another go. One company at the heart of the lobbying effort: Apple.
Other companies with mountains of cash abroad, including Oracle (Nasdaq: ORCL), Cisco (Nasdaq: CSCO), Duke Energy (NYSE: DUK), and Pfizer (NYSE: PFE), are also in the lobbying fight. Cisco CEO John Chambers has been especially vocal on the issue. During a conference call earlier this month, an analyst inquired about the size of Cisco's upcoming dividend. Chambers hinted that repatriation taxes could be the deciding factor:
The only question is, is it 1% or 2%? ... Every major developed country in the world, doesn't matter if it's Japan, it doesn't matter if it's Germany, France, you go right down through the list, all of them bring back those foreign earnings at 0% to 2%. So we have a tax policy that is just broken. It's at an unreasonable high rate, and then it's the worst of all worlds. The majority of our growth, almost 70% of our market, and probably 90% of long-term growth is outside of the country, and we have a policy that makes us non-competitive outside the country and then not only doesn't encourage us to bring it back, but penalizes it with double taxation.
Dumb rebuttals
The chief criticism with repatriation holidays is that, while they're marketed as a tool to help companies bring cash home to invest in new factories, they almost never work this way. Instead, repatriated cash winds up in the pockets of shareholders.
A Harvard study on the 2004 holiday found that "a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders." Dell (Nasdaq: DELL), for example, brought home $4 billion during the 2004 holiday, and promptly spent half on a share buyback. "Repatriations did not lead to an increase in domestic investment, domestic employment or R&D," bemoaned the Harvard study.
To which the only reasonable response is, so what? Try arguing that this cash is better off in a bank account in Geneva than in the pockets of domestic shareholders -- tens of thousands of whom are pension funds and mom-and-pop investors. If a repatriation holiday only accomplishes a payday for domestic shareholders, with no cost to taxpayers, I'd call it a huge victory. The end-all measure of economic success isn't whether more factories are built. It's whether we're better off. And after repatriation holidays, history shows that we are.
Don't blame Apple for not paying a dividend. Blame long-standing tax policy that encourages it not to.
Better yet, sound off in the comment section below.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor selection. The Fool has written puts on Apple. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of Apple, and Oracle. Motley Fool Alpha owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
