Revealed: The iPhone X… And How To Pay For It
Yesterday, Tim Cook — CEO of Apple Inc. (NASDAQ:AAPL) — took the stage at the new Steve Jobs Theater in Cupertino, California for the company’s annual new product launch.
No doubt, you’ve seen headlines from this event, including details on “Apple Park” — Apple’s campus which will be 100% powered by renewable energy and feature as many as 9,000 trees.
The company also unveiled its iPhone 8, iPhone 8 Plus and iPhone X, along with a new Apple Watch and 4K Apple TV.1
These are the types of announcements that drive short-term movements in Apple’s stock. Conventional investors get giddy about a shiny new product that looks exciting… Or they express disappointment if the announcement doesn’t live up to expectations.
But from my perspective, Apple’s event this week was just a sideshow. The real excitement for savvy AAPL investors has been on the books for quite some time now. And regardless of how investors react to Apple’s announcements this week, our cold hard reason for investing in this iconic company will remain.
Let me explain…
Apple’s Cash Is the Company’s Best Feature
Apple is currently sitting on a massive cash balance.
According to the company’s most recent quarterly report, Apple has $261.5 billion in cash.2 That’s up 13% over last year’s cash balance, and this cash hoard should continue to grow as the company generates profits quarter after quarter.
To put this number into perspective, Apple could buy the entire companies of Hewlett Packard and AT&T, and still have about $10 billion left over for “chump change.”
It is this giant pile of cash that investors are counting on to fund future dividends and share buybacks. And those dividends and buybacks are much more likely to drive long-term gains for investors than any new product that Apple announces this week.
So while the new Apple watch or 4K TV experiences are great for consumers, I’m much more interested to see how Apple will use its cash balance to boost your wealth.
$246 Billion in Cash Held Hostage
One of the biggest challenges for Apple (and for us as investors) is the fact that so much of Apple’s cash is held overseas.
Of the company’s $261.5 billion in cash, approximately 94% of that total is held in bank accounts outside of the United States. This cash comes from profits that Apple generated when selling its products and services to international customers.
The problem is that Apple can’t “repatriate” that cash (or bring that cash back to the United States), without paying tax on these balances.
Now to be clear, Apple has already paid income tax on these profits. But the tax has been paid to the various countries in which Apple generated the profits. So if Apple sold iPhones or watches in Germany, South America or China, the company has already paid taxes to those countries.
It seems preposterous that the United States would have a claim on these profits when none of them were generated in the U.S.
And that’s why the Trump Administration supports a tax reform package that will allow U.S. companies to bring cash balances held overseas back to the United States — while paying a much lower tax bill.
Of course, Congress has been exceptionally slow to address corporate tax reform. Instead, U.S. lawmakers have been too busy bickering about health care reform and other issues.
But corporate tax reform is still a high priority for both Trump and the Republican Party. So you can expect to see some tax relief for companies like Apple who hold cash overseas within the next year…
Higher Dividends, Share Buybacks and More Capital Gains
As Apple eventually gets the green light to bring its $246 billion in cash back home, I expect three things to happen with the company’s shares.
First, Apple’s dividend will increase. Apple currently pays an annual dividend of $2.52 per share. With 6.14 billion shares outstanding, this dividend amounts to roughly $15.5 billion paid each year.
At this rate, it would take nearly 17 years for Apple to distribute its cash hoard to investors. And don’t forget, the company continues to grow this cash balance by 13% per year. So once Apple is free to bring cash back to the U.S., expect to see the company dramatically increase its dividend.
Second, Apple will aggressively buy back shares. Over the past 5 years, Apple has decreased its share count by roughly 1.5 billion shares. This happens when a company uses cash to buy back shares from investors.
The benefit of a share buyback program is that with fewer shares outstanding, every dollar of earnings that Apple generates is divided between fewer shares. So that means your shares of Apple will represent a bigger portion of the company’s earnings (and collect a bigger portion of the company’s total dividends paid).
Third, Apple’s share price should move steadily higher. The combination of higher dividend payments and fewer shares outstanding should steadily boost the overall value of your AAPL investment. This gives you a great chance to increase your wealth, while also collecting an increasing flow of cash from Apple’s dividends.
Keep in mind, if you re-invest Apple’s dividends into new shares now, those shares will also be worth more as Apple’s share price rises. So compound interest will kick in to help further boost your wealth.
The bottom line is that today’s product announcements from Apple are certainly exciting and will likely have a short-term effect on the company’s stock price. But the real value of Apple’s stock comes from the company’s growing cash balance.
I encourage you to buy shares at today’s price — before the stock moves any higher. And once you have built a solid investment in AAPL, consider writing your congressman and asking him to do his or her best to get a tax reform bill passed, so that your cash can come back to the United States.
Here’s to growing and protecting your wealth!