Apple to report first profits decline since 2009???

[TheForce]

In the last 8 days, Apple stock has been on a tare to return to recover losses this year. Here's a brief summary on what's happening:

Apple reported a reduction in sales and earning from a year ago last Tuesday. It was higher than what the analysts predicted but still lower. Many believe that the rapid growth of Apple's earnings was not sustainable in % growth due to "Law of Large numbers" But the Billions in cash generated keeps piling up since Apple has a serious problem with cash management. It now has accumulated $145Billion in cash. $100B of it is overseas and can't be brought into this country for use because of excessive IRS taxation. So that leaves $45B to use. Still quite a bit of cash.

The stock has fallen from $705 to a low of $390 in the past year. This is due to the company not managing it's cash AND the belief that the company is delinquent in adding new products for more growth. All we get from Apple is promises on new products but with this qtr earnings report Apple has decided to distribute $100B back to shareholders in dividend increases and stock buybacks. The additional $60B needed to finance this return of cash to investors will be obtained through borrowed money at maybe 6% interest. This cuts the IRS totally out of the picture and increases the value of the stock. The value of the stock will increase over the next 2 years as Apple executes the 2 year plan. Yield from Dividends will be at $3.05 per share each quarter. Considering that Apple continues to gain $100B a year this plan is brilliant. During the past 7 days the stock has recovered $45 a share already.

So what about real growth? Growth in Apple is generated by inventing new markets. When it does that we will see new increases in the cash pileup and maybe an increase in share holder payback. But until that happens, with this change in how the cash is being managed, Apple has positioned itself as a value stock with growth now on hold, waiting for new markets.

If you decided that Apple had reached bottom and bought in when it hit $390 a share, you stand to make some nice returns. If you are still on the sidelines, this move is real and will pass you by. If your long on Apple and have shares, many bought at higher prices, get ready to get back to even and then pray for a new market or two to propel it even higher. If you have really old shares and are seeing a healthy gain, might be best to sell half or more but not all and enjoy the profits of your patience.

 

[TheForce]

Here's today's outcome on the Apple Bond deal, the largest corp bond in history:

The 3-year notes priced at 20 basis points above the 3-year fixed-rate Treasury note (3_YEAR), which last traded at 0.311%, he said. The 5-year Apple fixed-rate note priced 40 basis points over the 5-year Treasury note (5_YEAR), which last traded at 0.681%. The 10-year Apple note sold at 75 basis points over the 10-year Treasury note (10_YEAR), which last traded at 1.673%. The 30-year Apple note sold at 100 basis points over the 30-year Treasury bond (30_YEAR), which last traded at 2.879%.

The 3-year floating rate notes were priced at 5 basis points above Libor , and the 5-year floating rate notes priced at 25 basis points above Libor rate. The 3-month Libor was last set at 0.2731%.

One basis point is equal to 1/100 of 1% and yields move inversely to prices.

Overwhelming demand in the neighborhood of $50 billion worth of orders caused Apple to lower its guidance on bond yields early on in the day, said Tom Urano, portfolio manager at Sage Advisory.

While Apple has cash reserves of $144 billion, those are largely held overseas, necessitating debt issuance to avoid repatriation of taxes, said Gerald Granovsky, senior vice president at Moody's, in a report Monday. Read about how Apple will innovate over the next 30 years.

Apple's stock rose nearly 3% to $442.78 Tuesday, supporting the broad market, after falling below $400 last week from highs of close to $700 last year. Read about whether to buy Apple bonds or stick with the stock.

 

[John Kotches]

All this to evade taxes in their home market.

 

[TheForce]

Actually, its to put an end to the declining stock price, listening to the share holders. Start returning cash pile to the share holders. Borrowing the money from bond investors is just a way to do that and not pay double taxation, once for the company and second by the share holder.

Those who favor more taxation on others would view this as an unethical loophole. However when those same people get a loan to buy a car or mortgage on their home, they don't pay income tax on that borrowed money either. Not paying taxes on borrowed money is not tax evasion which is a crime. It's just that there is no law that makes people pay income tax on borrowed money. Considering interest on the bonds is far less than the taxes owed on repatriated off shore earned money, it's just smart to borrow the money and then pay it back with future taxable domestic earnings.

 

[dangue]

Actually, its to put an end to the declining stock price, listening to the share holders. Start returning cash pile to the share holders. Borrowing the money from bond investors is just a way to do that and not pay double taxation, once for the company and second by the share holder.

Those who favor more taxation on others would view this as an unethical loophole. However when those same people get a loan to buy a car or mortgage on their home, they don't pay income tax on that borrowed money either. Not paying taxes on borrowed money is not tax evasion which is a crime. It's just that there is no law that makes people pay income tax on borrowed money. Considering interest on the bonds is far less than the taxes owed on repatriated off shore earned money, it's just smart to borrow the money and then pay it back with future taxable domestic earnings.

Not repatriating profits is the tax avoidance. I don't think anyone was advocating apple having to pay taxes on borrowed money.

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[John Kotches]

Not repatriating profits is the tax avoidance. I don't think anyone was advocating apple having to pay taxes on borrowed money.

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Correct.

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[mike123abc]

Not repatriating profits is the tax avoidance. I don't think anyone was advocating apple having to pay taxes on borrowed money.

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This is why corporations want the tax laws changed. Most countries do not tax the corporation on profits made outside the country since they are taxed in the country the profits were made in, plus when the money is then given to the shareholders (via dividends or stock buybacks) the shareholders pay income tax. So, countless billions sit outside the country instead of coming back to be invested here.

 

[John Kotches]

This is why corporations want the tax laws changed. Most countries do not tax the corporation on profits made outside the country since they are taxed in the country the profits were made in, plus when the money is then given to the shareholders (via dividends or stock buybacks) the shareholders pay income tax. So, countless billions sit outside the country instead of coming back to be invested here.

If a corporation wants all the protections and comforts that the US provides, taxes are part of the cost of doing business.

Your counter argument will be that that US corporate taxes are higher than everyone else. True, but by contrast the taxes on our taxpayers via direct income taxes and nationwide sales taxes (aka VAT) are lower than most of the world.

The revenue has to come from someplace.

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[dangue]

This is why corporations want the tax laws changed. Most countries do not tax the corporation on profits made outside the country since they are taxed in the country the profits were made in, plus when the money is then given to the shareholders (via dividends or stock buybacks) the shareholders pay income tax. So, countless billions sit outside the country instead of coming back to be invested here.

Corporations want to have their cake and eat it too. There are too many corporations that makes billions in profits and pay zero in taxes. As an average tax payer who pays taxes every year, I find little sympathy for corporate greed.

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[mperdue]

Taxing corporations is pointless. They'll just add the cost of the tax to their other costs of doing business and pass it on the their customers in the form of higher prices. After they mark it up with the other costs you'll be paying more than you would have if if you'd have been taxed directly.

 

[mike123abc]

Corporations want to have their cake and eat it too. There are too many corporations that makes billions in profits and pay zero in taxes. As an average tax payer who pays taxes every year, I find little sympathy for corporate greed.

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Where do corporations get their tax money? Do you really think that they just take the tax hit and do not pass it on?

Every corporation eventually pays tax because they pay a dividend or other action which generates taxable income for their shareholders.

 

[TheForce]

When an investor buys stock he owns a share of the company. When his elected officers decide to return some of the profits back to the share holder, they have several ways to achieve this besides dividends. But, Dividends are simple and benefit the shareholder with a direct cash flow, although this is after tax dollars for the company as well as a taxable income to the recipient. It is done because shareholders often like the simplicity of the transaction as "found money" although it is a taxable event.

Another way for the company to increase shareholder value that is not taxable to the shareholder is to buy back their own stock with after tax dollars. The company pays the tax, unless they borrow the money to do it. That is more of a tax deferred through debt work around the tax laws. While this increases the value of the shareholder's investment it does not put cash in the shareholder's pocket. It is a paper gain in value that is scaled my the market from time to time. In order for the shareholder to realize any cash from this he must sell his stock and then pay cap gains tax. Otherwise it becomes a tax deferred holding of an increasing value stock.

The final way I am familiar with is a return of capital. This is not taxable to the shareholder since it is paid in cash similar to a one time dividend but it is seen by the tax code as the share holder's original investment he made with after tax dollars being returned to him. This reduces his basis in the stock held. I would have to ask an accountant but I believe these return of capital may impact the basis for capital gains if the stock is later sold. Personally, I have not seen this happen in my portfolio as return of capital and me selling the stock at a later date has not happened. I just know that the few Return Of Capital stocks I have had did not impact my taxes. I'm still holding these.

Most people I know, including here, believe that companies cheat the system and get off not paying taxes. The fact is they don't and just follow the tax code as it is written. The few that do cheat generally get caught. The vast majority of tax cheats are not corporations, but individual tax payers who worry about others not paying their "fair share" Most people feel the big corporations cheat because these people simply don't understand the tax code.

 

[John Kotches]

If i had a corporation's resources I could legally evade taxes on my money too.

Problem is, very few people have sufficient income to do this.



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[dangue]

When an investor buys stock he owns a share of the company. When his elected officers decide to return some of the profits back to the share holder, they have several ways to achieve this besides dividends. But, Dividends are simple and benefit the shareholder with a direct cash flow, although this is after tax dollars for the company as well as a taxable income to the recipient. It is done because shareholders often like the simplicity of the transaction as "found money" although it is a taxable event.

Another way for the company to increase shareholder value that is not taxable to the shareholder is to buy back their own stock with after tax dollars. The company pays the tax, unless they borrow the money to do it. That is more of a tax deferred through debt work around the tax laws. While this increases the value of the shareholder's investment it does not put cash in the shareholder's pocket. It is a paper gain in value that is scaled my the market from time to time. In order for the shareholder to realize any cash from this he must sell his stock and then pay cap gains tax. Otherwise it becomes a tax deferred holding of an increasing value stock.

The final way I am familiar with is a return of capital. This is not taxable to the shareholder since it is paid in cash similar to a one time dividend but it is seen by the tax code as the share holder's original investment he made with after tax dollars being returned to him. This reduces his basis in the stock held. I would have to ask an accountant but I believe these return of capital may impact the basis for capital gains if the stock is later sold. Personally, I have not seen this happen in my portfolio as return of capital and me selling the stock at a later date has not happened. I just know that the few Return Of Capital stocks I have had did not impact my taxes. I'm still holding these.

Most people I know, including here, believe that companies cheat the system and get off not paying taxes. The fact is they don't and just follow the tax code as it is written. The few that do cheat generally get caught. The vast majority of tax cheats are not corporations, but individual tax payers who worry about others not paying their "fair share" Most people feel the big corporations cheat because these people simply don't understand the tax code.

Don,

I've never said that they're cheating or doing anything illegal. But they are gaming the system pretty damn well (taking out loans instead of repatriating income with future loan payments being operational expenses that will offset future domestic income thereby further reducing their tax liability).

It's fundamentally unfair and problematic that they can defer and avoid tax liability for such princely sums when Joe Sixpack has no such ability.

Full disclosure, I am an Apple shareholder and regardless of that I recognize that it is heavily skews the tax burden of our system.

Anyhow, further discussion about this probably belongs in the PIT, but it's hard to feel bad for Apple in this situation.

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[TheForce]

It's fundamentally unfair and problematic that they can defer and avoid tax liability for such princely sums when Joe Sixpack has no such ability.

Actually ( and for John Kotches too) this is quite untrue! Well, maybe for those who are in the very bottom of the income scale, but then it doesn't matter anyway as they probably don't pay taxes anyway. They problem as I said is too many people just don't want to take the time to learn how they can manage their money to save on taxes too. They assume ( incorrectly) that these tax games are only there for the rich. Fact is, there are courses you can take to learn about these and then put them to work. Obviously, we at 5 figure annual salaries and total income can't save a half million in taxes, But maybe you are in the 15% bracket and have discretionary income. I'll bet in less than 20 minutes I could sample your money management and get you into a 10% bracket by changing the way you spend and manage money. The strategy is the same used by the big boys, only the tactics are different. You do know the difference between a strategy and a tactic, don't you?
It is completely untrue that Joe Sixpack has no means to achieve this. It may be true he doesn't care to learn how or take the time to learn how.

Anyway, criticizing the tactics used by Apple to achieve a tax free use of its resources, is indeed not appropriate for this section. I sometimes wonder why we even have threads here about the financials of tech companies but by practice it seems to be allowed. Debating whether fair or not is another topic, I agree. I just wanted to announce the news of what was done and what they hope to achieve as the results. It seemed appropriate to put it in this thread about Apple profits decline.

 

[dangue]

Tax discussions aside, Apple needs to figure out what to do with that money. Having it just sit there piling up is not going to help the company long term. Either repatriate it and use it to make strategic aquisitions domestically to bolster and expand the brand or use it to make acquisitions abroad. Long term, it may behoove Apple to have specific component manufacturing in house. Having to rely on others for processors and screens becomes problematic when those outsiders happen to also be competitors.

Hopefully this post helps pull us out of PIT territory.

 

[John Kotches]

Apple:

And many others are a fabless manufacturer. They make little out or nothing themselves. This isn't terribly unusual, but underscores how few companies actual manufacture goods.



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