Apple Dividend and Its Offshore Cash – Wall Street Journal (blog)

By Stephen Grocer and David Benoit

As Apple crosses $500, the market continues to wonder what it will do with its giant bucket of cash. Will Apple go shopping for acquisitions? Or will it finally give investors a dividend?

Bernstein Research today focuses on the question of an Apple dividend. Specifically, it examines how Apple’s large offshore cash pile would impact a dividend.

The firm says only about 1/3 of Apple’s cash is sitting in the U.S. and the rest is outside, given that most of Apple revenue is earned overseas.

Among large U.S. companies, Apple is hardly alone in generating a majority of its revenue abroad, and that fact has not constrained other companies from returning cash to shareholders. Of the 25 largest non-financial and energy companies in the S&P 500, 16 pay a dividend and 10 of those 16 generate a majority of their pre-tax income abroad, Bernstein says.

Yet Apple’s situation is unique. Many tech giants, pay a much lower international tax rate, under 10%, compared to 35%  in the U.S. (Most large S&P 500 firms pay an international tax rate between 13% and 25%.) Apple, according to Bernstein’s analysis, has an international tax rate under 3%. That means repatriating its overseas cash would come at a steep cost.

Making Apple’s situation more unique, the company would get hit with a large cash payment if it repatriates a certain portion of overseas holdings. That payment would impact cash flow.

“So what does this mean for a dividend/return of cash from Apple? First, we note that Apple currently generates 30% of its pre-tax income ($16B+) in the US and has ~$35B (1/3) of its cash onshore today – that would suggest that it could afford an ongoing 30% dividend payout of FCF, which would imply a current yield of 2.8%. Moreover, Apple could take on debt at a very low-rate (potentially around 1%) to boost US liquidity and its payout ratio, and wait for a possible change in US tax law that would be more favorable to repatriating offshore cash. On balance, we believe that prevailing circumstances should enable Apple to pay a meaningful ongoing dividend (i.e., 2.5%-3%) if it so chose, with no impact to its earnings or cash flow.”