A Tech Company’s Cash Position May Contain Hidden Costs
There was an interesting article in the November 15th Wall Street Journal: “Tech Firms Find It's Not Easy Holding Green”.
The thrust of the article was that many of the most successful tech firms (Apple, Google, Cisco) have huge cash balances, so it’s easy to buy their stock with the idea that part of the stock purchase is simply an exchange of cash. You’re exchanging the “cash” you pay for the stock for a “cash position” in the company in the form of your percentage share of the cash balance.
The issue, however, is often times the majority of the cash is in other countries; so that cash is not available to shareholders unless it is repatriated back to the U.S.: which is required if it is to be paid to shareholders as dividends. If the cash is brought into the U.S., it will now be subject to domestic taxes; so you could conceivably lose 35% of the cash value in the transaction.
This could be big money – Apple has a cash balance of $81.6 billion; but 66% of that cash ($53.8 billion) is overseas. So, if Apple chose to distribute that cash to shareholders, it could potentially lose $18.8 billion in value due to the tax liability that would be incurred by the very act of transferring it back into the U.S.
So, $18.8 billion in potential tax liability against an $81.6 billion cash balance translates into a 23% reduction in the “cash value” available to stockholders.
Another noteworthy point made in the article is companies with lots of cash (like some people we all know,) don’t consider purchases as carefully when they’re flush with cash as they do when cash is more scarce. In a low interest rate environment, cash becomes a non-performing asset because it’s not making any money sitting in the bank. Companies basically have three options: hold the cash, invest the cash, or return the cash to shareholders (either by dividend or stock repurchasing which increases the value of the relative stock position for the shareholders.)
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