In its second quarter 10-Q released on May 1, the Cupertino, California-based company said it would put in place a new $100 billion share buyback program and increase its quarterly dividend by 16 percent. To put it in perspective, Apple’s stock buyback is the size of the GDP of Ecuador, and due in large part to President Trump’s tax cut plan. Apple is a major beneficiary of the GOP tax cuts. Its effective tax rate (the amount it actually pays) has dropped by about 10 percent between this year and last, and it’s saving an estimated $47 billion on taxes on profits earned overseas as well. If that sounds like crazy money; it is.
Why would Apple, or any other company for that matter, use its newly found cash and buy back its own shares of stock from public stockholders? It seems like an oxymoron, because a company usually uses the sale of stock to raise capital, and now it is buying it back. The main reasons include, ownership consolidation, undervaluation, and boosting financial ratios. When companies repurchase shares of their own stock that leaves remaining shareholders with a bigger chunk of the company and increases the earnings they reap per share. Buybacks have become increasingly popular in recent years and have accelerated in the wake of the tax bill. Apple, along with companies such as Pepsi, Cisco and Amgen have all utilized the tax cuts to buy back shares.
Part two of the tax cut bonanza for Apple was increasing the amount of cash that is available to return to shareholders as dividends. Apple’s 16 percent dividend increase will push Apple’s planned annual dividend bill to $13.2 billion and makes it the biggest dividend payer in the world, according to Howard Silverblatt, analyst at S&P Dow Jones Indices.
Dividends are a distribution of shares or cash to existing shareholders. A company issues dividends when it wants to reward its investors. Stock dividends also have a tax advantage in that they aren’t taxed until the shares are sold by an investor. This makes them advantageous for shareholders who do not need immediate capital. Dividends are unfortunately the target of double taxation by the government. The income that the company uses to give dividends is taxed first, and then it is subject to a second taxation when the shareholder cashes in the dividends. Crazy but true.
Let’s take one more look at how this all happened. The $1.5 trillion GOP tax cut slashed the corporate tax rate to 25 percent from 35 percent, reduced the rate on corporate income brought back to the United States from abroad to between 8 and 15.5 percent instead of 35 percent. This has created a magnificent scenario for Apple. In Apple’s earnings conference call on May 1, CEO Tim Cook directly attributed the buyback and dividend hike to the tax cuts. “Tax reform makes it possible for us to execute our program more efficiently, both through share repurchases and payment of dividend to the tens of millions of investors who own Apple stock either directly or indirectly from large pension funds to individuals with retirement accounts.” Enough said.