Editor's note: an earlier version of this article cited an incorrect figure for the amount of cash Apple holds overseas. The article has been updated.
If there's one thing that can be said about the election process in 2016, it's that it's been unique. In just a matter of days we're going to find out whether the United States will be run by the first female president ever, or the first career businessman with no prior political or military background.
As the campaigns of both Hillary Clinton on the Democratic side and Donald Trump on the Republican side have pressed on, we've learned in greater detail where they stand on key issues. One of those issues that the American public has really pushed into the spotlight over the past year has been legal corporate tax shelters.
Donald Trump's corporate tax repatriation plan
By "legal corporate tax shelters" I mean the practice by which U.S. corporations are choosing not to repatriate profits earned in overseas markets because they would pay an exceptionally high tax rate on that income if they did. The U.S. corporate income tax rate of 35% trails only the United Arab Emirates and Chad. Because U.S. corporate income tax rates are so high relative to other developed countries, U.S. corporations now have nearly $2.5 trillion in profits stashed in overseas markets, based on a new report from Capital Economics. Comparatively, this figure has doubled since 2008, and it's up more than six-fold since 2002 when income stashed overseas accounted for less than $400 billion.
There's seemingly little incentive for companies to repatriate this cash at up to a 35% tax rate, but a languishing U.S. economy that's struggling to grow GDP at more than 1% per quarter could certainly use a capital and reinvestment infusion. Donald Trump believes he has a plan that could fix both problems.
Donald Trump, if elected, has proposed lowering the corporate income tax rate to 15% from 35% in an effort to put more money into the hands of businesses so they can hire, innovate, and expand. More importantly, he's advocated for a special corporate tax repatriation holiday rate whereby corporations with money stashed overseas would be able to pay a tax rate of just 10% on that income in order to bring it back into the United States. This cash could be a big boon to some of the largest U.S. multinational companies.
Trump's tax plan would really benefit these large U.S. multinationals
There are, in particular, five companies that would stand to benefit the most, since they alone account for more than a sixth of the nearly $2.5 trillion estimate in cash held overseas.
It may not be thought of as the poster child for corporate income tax avoidance, but software giant Microsoft (NASDAQ:MSFT) has nearly $110 billion in profits parked overseas. Could you imagine what would happen if it were able to repatriate this cash at a special 10% rate and was left with nearly $99 billion in cash!
For starters, Microsoft could wipe out every cent of the nearly $76 billion it currently has in debt and wind up with more than $20 billion to spare. It could also easily pay out a $10 a share special dividend, or even better, consider increasing its annual payout by $1 per share, per year, to increase its dividend yield to more than 4%. Though its smartest move might be to use that cash as an impetus to make earnings-accretive acquisitions. Microsoft is in the process of acquiring professional social network LinkedIn for $26.2 billion, and it could certainly benefit by using its overseas cash to bolster its social and cloud-computing offerings in the coming years.
The only other U.S. multinational with more than $100 billion in cash being held in overseas markets is conglomerate General Electric (NYSE:GE). If it were able to repatriate its cash under Trump's proposal, it would have a little more than $90 billion left over.
General Electric has always been an opportunistic company, which means the addition of $90 billion would likely results in substantial M&A activity. Over just the past month and change GE has acquired two 3D printing companies for $1.4 billion and wind turbine parts maker LM Wind Power for $1.65 billion. There are also rumblings on the Street that GE could take a bigger role in the oil industry and has been taking a close look at Baker Hughes. It's possible that shareholders could benefit with a dividend hike, but GE would likely look to M&A if it were to repatriate its overseas cash pile.
If tech giant Apple (NASDAQ:AAPL) has any issues, cash is not one of them. Following its recently released third-quarter report, Apple now has $237.6 billion in cash, albeit it also has a record $75.4 billion in debt on its balance sheet, too. Of that total, $216 billion of Apple's cash is held overseas.
Assuming Trump's repatriation holiday rate were to prevail, Apple would walk away with about $82 billion in cash. This would be more than enough to completely wipe out its debt. Not known as much of an acquirer, Apple could use its repatriated capital as a means to buy back more stock and increase its dividend payout to shareholders. Apple could consider getting aggressive and repurchasing up to 10% of its outstanding common stock, or it could probably even double its annual dividend, pushing its forward yield to almost 4%.
U.S. drug giant Pfizer (NYSE:PFE) also has a lot of cash tied up in overseas markets. According to Capital Economics, Pfizer has about $80 billion in cash overseas, which would leave it somewhere near $72 billion if a 10% repatriation holiday rate were enacted.
There's a lot Pfizer could do with access to an extra $72 billion in the United States. For starters, it could consider making a serious dent in the $44 billion in debt on its balance sheet, or boost its $1.20 annual payout to push its yield well above 5%.
However, the more likely scenario is Pfizer using the capital to reinvest in its organic research and development, as well as (you guessed it) more M&A. Pfizer purchased Hospira for its biosimilar and injectable drug portfolio in 2015, and in 2016 it's acquired Anacor Pharmaceuticals for its experimental non-steroidal eczema product, and Medivation for its oncology blockbuster Xtandi (which was co-developed by Astellas Pharma). Inorganic growth is a big part of Pfizer's long-term growth strategy, and its repatriated cash could be a means to that end.
Finally, software giant IBM (NYSE:IBM) has more than $65 billion in cash sitting in overseas markets. If Big Blue were able to repatriate its overseas cash at a special 10% rate, it would gain access to about $60 billion that could be used in the United States.
It's quite likely that IBM would use at least some of its cash to boost its shareholder yield. It's no secret that IBM was late to the cloud-computing party, and it's looked to cut costs and boost shareholder yield to thank shareholders who are sticking by the tech giant's long-term business transformation. IBM could very easily repurchase 10% to 15% of its outstanding common stock, or push its yield north of 5% to appease long-term shareholders.
Another possibility is IBM could buy its way to cloud-computing growth with its repatriated cash. IBM has been mostly dinking and dunking its way to inorganic growth, however a $60 billion cash infusion in the U.S. could change that strategy.
It's important that readers understand these are hypothetical scenarios of what these companies could do with their overseas cash if it were repatriated; and that these scenarios are wholly dependent on both Donald Trump being elected as president, and him being able to get his corporate tax holiday rate implemented by Congress. These are some big "what if's" that should be taken into consideration when analyzing the future of any of these companies.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of and recommends Apple. It also owns shares of General Electric, LinkedIn, and Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.
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